I went out for pizza the other night, but had to eat it in my car.
That’s because the Frank Pepe’s in Manchester, Connecticut had this sign on its door.
“Attention: Dining Room closed after 4 p.m. today due to staffing shortages.”
So I ate in my SUV, no problem, (the pizza was fantastic), but it made me think 1) this can’t be good for Frank Pepe’s, and 2) the note on the door is literally a sign of the times.
A sign we’re living in a world where supply shortages — employees, oil, semiconductors — are commonplace and impacting the economy to a degree we haven’t seen for decades. The implications on inflation, Fed policy, a possible recession and our global well-being are immeasurable.
Supply constraints are everywhere these days, some Captain Obvious, others more opaque. In some instances economic downturns are caused by drops in demand. That might be the result of a stock market crash like after 1987 or 2000, as consumers have less money to spend. Or it could be an event like the February to April 2020 COVID recession, when people didn’t venture out to buy things.
Supply shocks can cause downturns or recessions, too. “In the 1970s, there were two mega supply shocks,” economist Nouriel Roubini told me during the recent Yahoo Finance All Markets Summit. “One was the war between Israel and the Arab states which led to a spike in oil prices in ’73 and the second one was the [1979 Iranian revolution] which also caused a spike of oil prices. This time around, the spike is not just in an oil crisis, it is natural gas, food, fertilizer, industrial products, and semiconductors.”
Since the onset of COVID, the global economy has been battered by both supply and demand shocks, which have vexed leaders around the globe. The roughly $5 trillion of stimulus our government put into the economy jacked up demand for cars, homes and meme stocks, etc. Given those aforementioned supply constraints, it’s hard to recall a time with such pronounced supply-demand mismatches.
One effect has been inflation, currently running at 8.2% — still hovering near the 40-year high of 9.1% we saw in June. Can we discern how much of that comes from the demand side, how much from supply? Phil Levy, chief economist at Flexport, says that while Europe’s energy problems suggest a supply shock, too much demand is the bigger problem.
“The largest part of what we’re seeing with [higher] prices is coming from demand, which has increased — and supply can’t quite keep up with the pace,” Levy says.
The causes of supply deficiencies
Let’s drill down into those supply deficiencies, the causes of which include the pandemic, the great resignation, Russia’s invasion of Ukraine, de-globalization and climate change — or some combination of these factors.
Putin’s invasion of Ukraine has disrupted supplies of wheat, corn and grain and even sunflower seeds. His stranglehold over Europe’s natural gas supply, plus the sabotage of a pipeline there, plus boycotts of Russian oil and gas means less energy for Europe and beyond. There are already slowdowns and stoppages of manufacturing. Winter is only 60 days away, and rationing for heat is a distinct possibility.
This is a global supply problem. How about this recent headline from the Wall Street Journal: “New England Risks Winter Blackouts as Gas Supplies Tighten Grid officials warn of strain as the region competes with European countries for shipments of liquefied natural gas.”
Speaking of New England, climate change can wreak havoc on supply, as you may find out this Thanksgiving when your cranberry sauce is prohibitively expensive or even non-existent due to shortages. Why? Extreme drought in New England, which Zachary Zobel, a scientist at the Woodwell Climate Research Center in Massachusetts, told Grist was the result of climate change. Climate change is disrupting the supply chain in many other ways, and on a much bigger scale.
The chip shortage has also been hitting industries across the globe — including the auto business, as GM CEO Mary Barra recently told me. But it’s not just the huge corporations being hit by low chip supplies. My alma mater, Bowdoin College, recently ran into supply-chain snags while trying to complete some buildings.
“Due to chip shortages, the companies that manufacture the controls for our AV systems have announced 12-24 month shipping delays, and we are being warned that networking equipment will be similarly challenged,” Michael Cato, Chief Information Officer. “This complicates our planning in multiple ways including timing for financial budgets and navigating the multi-year timeline of construction projects.”
There might also be a shortage of workers to complete those projects. The great resignation has hit many businesses, but it’s also affecting the government. John McQuillan, CEO of Triumvirate Environmental, which disposes commercial and hazardous waste, has a business that requires government permitting — a process he says has slowed.
“We want to increase our processing capacity, but you have a bunch of regulators who have resigned. The more experienced people tend to be older. I have four or five things pending in the United States, Canada and Mexico right now. And in all of the instances I hear is, ‘We have staffing shortages, the key person has retired, or we’re waiting to hire somebody for that position.’”
What do we have in our anti-inflation toolkit?
What can be done about supply issues? Remembering, they are a significant cause of inflation and possibly a recession. Ideally, the Federal Reserve can moderate inflation by raising interest rates. Unfortunately, the Fed’s traditional tools, raising interest rates and shrinking its balance sheet, are about curbing demand, not increasing supply. That doesn’t mean that policymakers and the private sector are helpless.
Michael Spence, a Nobel laureate in economics and professor emeritus at Stanford, writes in Project Syndicate that higher rates and withdrawing liquidity “threaten to push global growth below potential.” “There is another way,” he says, “supply-side measures.” Like what? Spence argues that “creeping protectionism must be reversed,” and urges a removal of tariffs. He also says that efforts must be made to improve productivity. “Many sectors — including the public sector — are lagging, and concerns about the effects of automation on employment persist.”
In a recent report by the Center for American Progress, a liberal think tank in Washington, chief economist Marc Jarsulic argues for expanding the uptake of COVID-19 vaccines to reduce labor and manufacturing supply shocks, providing additional support for child and home care to raise labor force participation and reducing limits on working-age immigration to increase labor supply.
“Actions such as these are not part of the standard anti-inflation toolkit, but given the changing economic environment, they ought to be,” Jarsulic says.
In fact all these supply issues may produce a silver lining, argues Financial Times columnist Rana Foroohar in her new book “Homecoming, The Path to Prosperity in a Post-Global World,” who notes: “The supply chain disruptions of the last few years have now lasted longer than the 1973–74 and 1979 oil embargoes combined. This isn’t a blip but rather the new normal.”
The book argues that “a new age of economic localization will reunite place and prosperity. Place-based economics and a wave of technological innovations now make it possible to keep operations, investment, and wealth closer to home, wherever that may be.”
Here’s hoping Foroohar has written the silver lining playbook.
This article was featured in a Saturday edition of the Morning Brief on Oct. 22. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
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