Goldman Sachs cuts GDP forecast, saying hit from delta variant is worse than expected

Published Thu, Aug 19 20216:21 AM EDTUpdated Thu, Aug 19 20219:08 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The rise of the Covid delta variant will hamper economic growth in the third quarter, but the U.S. economy should continue to see a strong expansion going into next year, according to Goldman Sachs. Chief economist Jan Hatzius cut his projection for third-quarter gross domestic product growth to 5.5% from 9%. He said in a note to clients on Wednesday evening that health concerns would lead to lower consumer spending. "Spending on dining, travel, and some other services is likely to decline in August, though we expect the drop to be modest and brief. Production is still suffering from supply chain disruptions, especially in the auto industry, and this is likely to mean less inventory rebuild in Q3," the note said. The delta variant has caused a spike in cases around the country, forcing some hospitals in Southern states to ban elective surgeries and deploy extra beds. Fears about the virus were seen as a driving force in last week's dramatic decline in consumer sentiment . Still, this wave of cases may have peaked in some of the hardest hit areas, leading to hope that the hit to economic growth will be short-lived. "Lower growth in Q3 should imply stronger growth in Q4 and 2022 as virus fears hopefully diminish and the service sector recovery and inventory rebuild resume, and we have raised our forecasts beyond this quarter," the Goldman note said. Hatzius now projects full-year growth for 2021 and 2022 to come in at 6% and 4.5%, respectively. He previously predicted 6.4% and 4.4%. Additionally, Goldman warned that the variant could cause another spike in prices for products whose supply chains have been hit hard by the virus. "We now see further short-term upside for new cars, consumer electronics, and appliances, and have therefore bumped up our core PCE inflation forecast to 3.75% year-on-year at end-2021," the note said. "As prices of these goods and used cars fall next year, we expect core PCE inflation to dip below 2% next summer and to end 2022 at 2%." -CNBC's Michael Bloom contributed to this report.

Food is served at an outdoor restaurant in New York, August 3, 2021.

Caitlin Ochs | Reuters

The rise of the Covid delta variant will hamper economic growth in the third quarter, but the U.S. economy should continue to see a strong expansion going into next year, according to Goldman Sachs.