When Senator Joe Manchin doomed the Biden administration’s $1.75 trillion Build Back Better infrastructure bill this Sunday, citing inflation concerns, he also threw into confusion the very economic recovery he claims to hold dear. It’s a delicate time for the economy: COVID-19 is still looming over everything, prices are rising, and wages are mostly not keeping up. Next year could be even harder, with the Federal Reserve plowing ahead to make it harder to borrow, possibly sucking billions out of the economy. At the same time, coronavirus cases are spiking yet again.
Harsh new lockdown measures are unlikely anywhere in the country, especially since the Omicron variant may be milder than its predecessors. But between the new infection wave and the demise of BBB, the economy could soon look a lot like this past weekend’s Saturday Night Live episode: cobbled together with a skeleton crew and not very good. The one-two punch sent markets into a free fall on Monday, with the Dow Jones Industrial Average shedding more than 650 points before recovering a bit, in one of the worst days since news of Omicron first spooked markets on Black Friday. It’s a stark turnaround from the state of play last week, when BBB seemed weakened but passable and the finance sector viewed Omicron as a positive development that ultimately could herald the end of the pandemic era.
That narrative seemed less popular on Wall Street after the weekend. In New York City, more than 11,000 people received a positive diagnosis on Saturday, the largest daily number since the pandemic began, and almost certainly a significant undercount. The new variant is now spreading rapidly across vast swaths of the country, and the footage of long lines at testing sites and record numbers of infected have made the threat far less abstract than it had seemed. Omicron, one Wall Street trader told me, is “not as bad as the initial strain in terms of people getting sick, but if you multiply the numbers by four, five, and you do the math around who’s not vaccinated, that puts the health-care system under stress.” (Why this wasn’t clear to traders last week, when many epidemiologists were making exactly that point, is unclear.)
Take a look at how our economy is structured, and the problems Omicron presents become obvious. About 128 million people work in jobs that require human interaction, as bank tellers, baristas, cashiers, and the like. That makes the service industry by far the largest sector of the economy. “In the larger scheme of things, it’s the inability of the services economy to pick up the pace in a situation where the infection rates are rising. That’s a bigger risk to the first quarter,” said Madhavi Bokil, a senior vice-president at Moody’s Investors Services. The country was already dealing with a persistently high level of cases per day, but a huge spike — even without a correlating rise in hospitalizations and deaths — could depress some portion of the service industry, which was just finding its footing again.
Manchin’s “no” throws up another obstacle to economic growth. The Build Back Better plan would have essentially worked as a stimulus bill, pumping in money to the economy and easing the way back to relative normalcy. Instead, people will find it harder to access money as stimulus and welfare payments dry up, borrowing costs surge, and student-loan payments return — all of which will be harder to withstand without a fiscal cushion. Goldman Sachs economist Jan Hatzius published a research report Sunday forecasting that smaller piecemeal legislation is unlikely to pass, which shrunk the firm’s economic-growth expectations by hundreds of billions of dollars over the course of this year. That’s partly because the Child Tax Credit, which delivers as much as $6,000 a year to some parents, is set to expire on December 31. The money from the program tends to go directly back into the economy, as parents spend it quickly on their children. “Where it really would have supported immediate growth is the extended Child Tax Credit aspect of the bill,” Bokil said. Over the long term, it would increase growth by funding training and education for workers and supporting fast-growing industries like electric vehicles and sustainable energy.
The economy has already slowed since this summer, as gummed-up supply chains have delayed goods and led to a spike in prices. Now the picture that’s developing of 2022 includes slower growth, less money in people’s bank accounts, and the rapid and continued spread of a stubborn virus. And with 42 million people starting to pay student loans again on February 1 — the average monthly payment was just under $400 in 2017 — the Fed could start hiking interest rates on mortgages and credit cards as early as this fall to keep prices from rising out of control. Bokil said that stagflation, a toxic mix of stagnant growth and rising prices, is a possibility if prices keep on rising at steep levels, though Moody’s isn’t predicting that.
Things could change. If Omicron is much milder than previous strains — a big if — perhaps the disruption it causes will be more minimal than feared as the country learns to live with endemic COVID. And on the legislative front, the Washington Post reported on Monday that Manchin had made a counteroffer to the White House, which included universal pre-K and some funding for climate change and sustainable energy, though no Child Tax Credit. Maybe there’s a deal to be made after all. Still, what’s clear is that all the optimistic assumptions about the fragile recovery and the hopes about ending the pandemic era might have to be rethought. “It’s the unknown,” the Wall Street trader said when I asked him what’s driving the markets down so sharply. “I think it’s gonna be a lot worse than people think.”