Delta Spillovers By The Outdoor Bar

With the Delta variant running rampant, you might be asking yourself whether sundry supply chain disruptions which may have otherwise been on the cusp of resolving, will now linger. Or begin to worsen anew.

I mean, not really. It’s mid-August. Odds are, that’s the last question you’re asking yourself if you’ve been any semblance of successful as a market participant.

Hopefully, you’re wandering (bleary-eyed) down to the outdoor bar at a beachfront hotel somewhere, where you’ll order a shot of vodka and a 20-ounce Bloody Mary chaser, knowing you’re just seconds removed from that glorious feeling when the hangover symptoms dissipate as the new alcohol is absorbed and begins to course through your bloodstream. Minutes after that, trembling hands will suddenly be imbued with the precision and dexterity of a brain surgeon. Seconds later, the last remnants of unpleasant cold sweats will dry up, making way for the good kind of sweat — that brought on by a barely-noon sun.

But somebody out there is chained to a desk. Figuratively, one hopes. If that’s you, and you’re trying to parse various virus headlines for clues about the duration of price pressures and the read-through for the duration of your portfolio (see what I did there?), you might be mildly interested in a few highlights from a recent Goldman note I stumbled across.

“Any setbacks in Asia could spill over to the US at a time when supply chain disruptions are already the most severe and widespread in decades,” the bank’s Joseph Briggs and David Mericle wrote, noting that those very types of supply-side problems “accounted for much of the disappointment to our initial Q2 GDP growth expectations and have lingered into Q3.”

The good news is, a straight statistical analysis shows that increases in the bank’s Effective Lockdown Index for Asia Pacific nations only translate to material increases in those nations’ (i.e., local) supplier delivery times. Spillovers to the US are “modest” according to… well, according to numbers.

But numbers can be deceiving. The (amusingly paradoxical) problem with statistics is that despite being a science which purports to account for (even quantify) uncertainty, there’s still an embedded “all things equal” disclaimer when you apply it to the real world. For example, Goldman’s Briggs and Mericle noted that once you step outside of the “purely statistical” realm, nonlinear dynamics emerge. “Of course, the effect of supply chain disruptions on production is often muted until inventories run out, a nonlinear dynamic currently visible in the impact of the semiconductor shortage on the auto industry,” they wrote.

How to overcome that when assessing the threat to supply chains for Delta variant containment measures? Well, for Goldman, a straightforward way is to just calculate the share of US imports from Asia Pacific economies for intermediate inputs and consumer goods for which there are shortages.

Briggs and Mericle flagged a trio of what they called “key risks.”

While they don’t foresee total shutdowns at semiconductor plants (Asia Pac accounts for around half of semis used stateside), they cautioned that “the plants rely on a long supply chain in the region that could be vulnerable to tighter restrictions.”

They also warned on “some risk” that auto parts producers in Southeast Asian nations adopting strict containment measures might curtail production in Japan, thereby jeopardizing auto exports to the US, where new car inventories are already tight.

Finally, there’s China. As much as 9% of domestic-use plastics, semis, furniture, and apparel would be at risk If China is forced to crack down even harder on COVID, a distinct possibility considering Xi’s “zero tolerance” policy towards virus outbreaks.

Needless to say, those supply chain risks would pose related problems vis-à-vis upward pressure on prices in the US where, despite a relatively benign July CPI report, one political party is keen to pounce at every opportunity to castigate fiscal expenditures as fuel on a raging inflation fire.

Ultimately, though, Goldman seems to doubt that any spillovers from Asia Pac would pose a serious threat. As far as America’s own Delta problem, Briggs and Mericle wrote that “We expect the direct impact of the Delta variant on the US economy to consist mainly of a delay in the final steps of reopening, rather than a major reversal.”

Now go back to your vacation.