Covid-19 Resurgence Slows Travel Growth

A drop in retail spending and more cautious forecasts from travel suppliers suggest a setback after the summer’s blazing pace of recovery.

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A Covid-19 resurgence this summer has caused consumers to turn cautious, while investors trim their investments in a travel sector still struggling to recover.

Retail sales dipped a surprising 1.1 percent in July as consumers spent less on clothing, furniture and sporting goods. At the same time investors have been retreating from cruise lines, airlines and other travel-related stocks as those companies face another potential stall in activity as cases of Covid-19 surged because of the highly contagious Delta variant.

The pullback in spending and investments in the travel sector mark an unwelcome reversal from growth through much of the year. Vaccinations seemed to be knocking down the virus, giving people more freedom to shop at stores, eat out and plan trips after more than a year of hunkering down at home. "Clearly, as we learned over the course of the last 18 months, this thing takes twists and turns that are undefinable," said Mike Stritch, chief investment officer of BMO Wealth Management.

Some of the pullback in consumer spending on goods was expected as people increased spending on services. The services sector, including restaurants, started to bounce back with growth accelerating to a record pace in July, according to The Institute for Supply Management.

Analysts don't expect another series of lockdowns, but people could start to cut their trips to restaurants and other public spaces, crimping the service-sector recovery. "Our sentiment indicators are starting to flash from bright yellow to red," Stritch said. "That gives a pause, potentially, in the short run."

Concerns have been rising on Wall Street for several months now as analysts and investors warily tracked the rise in virus cases. The resurgence was strong enough that at the end of July the CDC recommended that even vaccinated people resume wearing masks indoors in public places.

Several airlines have warned that the virus surge could ground their recoveries. Southwest Airlines no longer expects to be profitable in the third quarter, after recovering enough to post a profit during the second quarter. Spirit Airlines has said that a service meltdown that started in late July and a rise in Covid-19 cases are causing more last-minute cancellations and softer bookings.

Major retailers have not yet signaled concerns over the resurgent virus keeping shoppers at home. Both Walmart and Target have given investors an upbeat forecast for the remainder of the year. Investors are signaling more caution, however.

The S&P 500's consumer discretionary sector, which includes clothing companies and other retailers that rely on discretionary spending and in-person services, is down nearly 1.5 percent in August after gaining only 0.5 percent in July. The sector rose just under 3.8 percent in June.

"A lot of the people who were optimistic that reopening would happen quickly are obviously disappointed, but we're looking at what's happening with the Delta variant as more of a setback, not a change in direction," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.