How Demand Outpaced Supply

Mr. Demand and Mr. Supply were constantly jogging along the Economic Trail.  Most of the time, they ran in tandem, at about the same speed. But sometimes Mr. Supply ran ahead of Mr. Demand and often the roles were reversed. But then, they would instinctively adjust their pace to get back into balance once again.

Mr. Price always accompanied Mr. Demand and Mr. Supply on the trail. Mr. Price could be unstable so instead of jogging he rode a bicycle. When Mr. Demand got ahead of Mr. Supply, Mr. Price would pedal faster to get ahead of Mr. Demand. Then he would force Mr. Demand to slow down so Mr. Supply could catch up to him. When Mr. Supply ran ahead of Mr. Demand, Mr. Price would drop back, causing Mr. Supply to slow down and Mr. Demand to speed up. In both circumstances, as soon as Mr. Demand and Mr. Supply were back in sync, Mr. Price could be found pedaling right beside them.

Everything was moving along fine on the Economic Trail until March of 2020 when both Mr. Demand and Mr. Supply were infected with COVID-19. Both guys immediately stopped and sat down on the trail  to recover. Fortunately, Mr. Demand had only a mild case of the virus. Soon he felt much better and started running again at a modest pace.  Unfortunately, Mr. Supply got much sicker from the virus. He lay weak and dormant for a couple months. He finally got up and tried to run but stumbled along at a slow pace.

Mr. Demand continued to recover and picked up the pace. His Uncle Donald even gave him some strong coffee to help his recovery. Mr. Demand was now running much faster than still sickly Mr. Supply, and the gap was widening. Mr. Price had also been infected but was asymptomatic. He had stopped on the trail, waiting for Mr. Demand and Mr. Supply to recover. He had followed Mr. Demand back on the trail and expected Mr. Supply to follow them, but he had not.

Now Mr. Price was pedaling faster but didn’t know quite what to do since Mr. Demand was not slowing down and wasn’t concerned at all that Mr. Supply was falling so far behind. The gap between Mr. Demand and Mr. Supply had not been this wide for many years.

Even though Mr. Demand appeared to be healthy, his Uncle Joe was concerned he was not running fast enough. So, Joe gave him an energy drink, a stimulus, to get him to run faster. But no one was concerned with the condition of Mr. Supply. Even though Mr. Supply was increasing his pace, Mr. Demand was still running much faster.

Uncle Joe was so happy that the first stimulus worked so well, he jolted Mr. Demand with a second energy drink. Now Mr. Demand was sprinting at top speed. However, even though Mr. Supply was trying to run faster, there were obstacles on the trail which slowed him down. He asked for people to work to help him run faster, but they were too distracted by Mr. Demand’s stimulus, to aid Mr. Supply. Others declined to help due to the persistence of the pandemic.  And some potential workers had left the trail altogether. He also needed a new pair of running shoes, but he couldn’t get them due to a shortage of silicon.

So, no matter how hard Mr. Supply tried to catch up, he could not, and Mr. Demand was now miles ahead of him. This motivated Mr. Price to pedal faster than he ever had since the 1980’s. He needed to get ahead of Mr. Demand and slow him down, so Mr. Supply could catch up. But he was pedaling so fast that his tires got overheated and are now highly inflated, and he fears a blowout, which could lead to a crash.

And so it goes ……

This post originally appeared in the FTR blog. For more information on FTR, the leader in commercial freight analysis and forecasting: FTRintel.com 

Let The Roaring Twenties Begin!

In ’21, we see an economic recovery unlike never before. Of course, I am referring to 1921, after both WWI and the Spanish flu had ended. But the country's mood now, as vaccines work to end this pandemic, is beginning to rise toward a euphoric state.

This, combined with tremendous government stimulus efforts, has caused the demand for goods to skyrocket. The GDP forecasts for 2021 continue to move higher. FTR (Freight Transportation Research) forecasts 2021 GDP growth at 6.1%. In the latest Wall Street Journal survey of economists, the range is from 2.4 – 10.0%, with the average at 6.0%.

The ISM (Institute of Supply Management) Indexes, which are forward-looking, confirm there is robust demand present now and in the foreseeable future. The March Manufacturing PMI spiked almost four percentage points to 64.7, the highest reading in 37 years! IHS Markit’s Index placed it at the second-highest reading ever. Likewise, the Services PMI jumped over eight percentage points, to 63.7, an all-time high.

The economic shutdown in March-May 2020 created enormous pent-up demand in the economy. It produced a “sling-shot effect”, where commercial activity was held back and then propelled forward rapidly. Therefore, substantial pent-up demand built up during the economic lockdown and was unleashed in the restart.

However, there was no pent-up supply, rather the opposite, in fact. Factories shut down, during well, the shutdown. Unfortunately, the restarts in many industries have been difficult. Manufacturers had to install COVID safety protocols. Workers have been reluctant to return to jobs either based on personal health concerns or generous government assistance. The global supply chain was also impacted, resulting in huge backlogs at the ports. Throw in February’s polar vortex, and you get an unprecedented widespread shortage of components, parts, and industrial output.

The result is surging demand combined with pent-up demand, matched up against constricted supply. Of course, this creates more pent-up demand since manufacturing has still not caught up in the short term. Pent-up demand clouds the economic forecast because it is difficult to measure and determine how long it will take to catch up. However, the ISM numbers show it is massive and growing.

For an estimate of overall manufacturing pent-up demand, it appears that the current supply of Class 8 trucks is running about 20% behind demand. Truck manufacturing is being impacted by the shortage of semiconductors, but many industries are not. Therefore, let’s estimate the total pent-up demand in all manufacturing at 15%. Meaning the supply is running 15% below total demand. Combine this with the enormous pent-up demand in the service industries due to the pandemic, and the economy is set up to surge in the next 12 months.

When there is another pandemic, perhaps world governments should expand the definition of essential workers to include those industries that should not be shutdown because their products are essential to a restart. They could receive government loans to build inventory and quickly repay the loans when the

inventory sells.

If you never understood what the Roaring Twenties were, you are about to get a very personal history lesson. But whenever I make that statement, the comment I always hear is: Yes, but remember what followed the Roaring Twenties.

Well, advancements in medical intelligence and technology have enabled us to significantly limit the fatalities from COVID-19 versus the Spanish flu, on a population percentage basis. Let’s hope our knowledge in the field of economics has made similar advancements.

This post originally appeared in the FTR blog. For more information on FTR, the leader in commercial freight analysis and forecasting: FTRintel.com 

Are the Fears Inflated?

You’ve probably seen the headlines about some economists becoming increasingly concerned about inflation. So, should we be concerned?  (Note: please keep reading. This is not one of those in-depth analysis involving T-bills and yield-curves, but more of a big picture, horse-sense type of view.)

Definitions

The most basic definition of inflation is: Too many dollars chasing too few goods.

A more precise definition from Investopedia:

“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.” 

Some inflation can be good

Complicating Factors

Inflation is inherently challenging, because it means your money is worth less, because it can buy less goods or services. However, economists generally believe that a low, and steady, inflation rate of around 2% is good because it signifies a growing, healthy economy. Inflation, under control, does help to balance out imbalances in basic supply and prices.

We have not had to deal with high inflation for a long time. The last time inflation was above 5% was in 1990. The last time inflation was above 10% was 1980. The Clinton administration achieved strong economic growth, with low inflation, by significantly increasing imported low-priced goods from China. Economists labeled this strategy as “importing deflation”. This strategy worked so well it has been advanced by every administration since then, except for one.  But that’s a political discussion, and I’m not swimming in that pool.

The other factor limiting inflation has been technology, especially the tremendous efficiency benefits provided by the Internet. Technology and the efficiency it provides, lowers just about every type of cost, thus reducing inflation.

Current Situation

But let’s get back to this “Too many dollars chasing too few goods” thing. Why are economists concerned?

Too Many Dollars?

The government flooded the economy with cash in 2020 with the stimulus deals. This helped many people in financial distress, but many people received checks they didn’t need.  Consumers spent this windfall or saved the money for future purchases. And now, there is even more stimulus money on the way. From my point of view, there are too many dollars currently in circulation. This by itself might not be a problem, but...

Too Few Goods?

Ever since the economic restart, some goods were in short supply. The list included both consumer goods and industrial goods in an extensive range of industries. For example, there was a severe shortage of hotel towels in October, and some of those are produced in Pakistan. And now, there are reports of cat food shortages in some areas of the country.

While many of the shortages have been alleviated, some have intensified. We see the headlines for computer chips and steel, but we know in the commercial equipment industry that these products and a host of others are in short supply. The supply chain is in a mess. I’m guessing manufacturing material, and component shortages are in the worst shape since WWII.

So, we can’t make enough products to satisfy demand. Combine this with consumer products sitting on ships for days waiting to dock and then being delayed a few weeks due to port congestion, and you end up with too few goods. The inventory numbers confirm this.

What? – Me worry?

Federal Reserve Chairman Jerome Powell has finally admitted that he expects some inflationary pressure as the economy reopens but expects it to be temporary. Previously, he said he is not concerned because inflation doesn’t “change on a dime” and that a return to standard 2% inflation rates is not a danger. He also thinks the FED will be able to control the inflation once it starts.

In effect, he is saying they will be able to control the boulder once it begins to roll downhill.

What happens, however, if that boulder rolls right over the FED and anything else you put in its way. It’s like the old Chaka Chan and Rufus song: “Once you get started, oh it’s hard to stop”. Inflation isn’t something you want to see gaining speed quickly. 

Big Difference of Opinion

There are those economists sounding the alarm based on the factors previously cited and the movement in the 10-year treasury yield curves. But Chairman Powell and other economists in the Biden administration say “Move along, nothing to see here”. Of course, they can’t both be right. So, hope for the best, but be prepared for the worst.

This post originally appeared in the FTR blog. For more information on FTR, the leader in commercial freight analysis and forecasting: FTRintel.com 

 

If You Start Me Up - Restarting the Industrial Economy

 When the economy was in lockdown there was a strenuous debate on what would happen when the lockdown ended. One argument was the economy would stay in recession for months before gradually recovering. This view supported the case of preserving the lockdown since there was little benefit to opening back up. “You can’t just turn the economy back on like a light switch”, they claimed. The opposite view claimed that when the economy reopened, there would be a “V” shaped rebound, with the economy taking off like a rocket. This argument supported opening the economy up fully and immediately, despite the health risks.

As it turned out both sides were wrong, or at least only partially correct. After the fifty governors started reopening their state’s economies to one degree or another, economic activity jumped, but it wasn’t a capital “V” recovery. It was more like a lower case “v” recovery. This is because manufacturing has been lagging compared to the robust comeback in the consumer goods sector. When that proverbial light switch was turned on, the demand side of the consumer economy snapped right back, except for those contact-service industries. Demand also jumped on the industrial side but it is hard to gauge due to the

If you start it up!

supply factors discussed later.

Consumers who were able to maintain their income, spent heavily on goods and non-contact services. In many cases, they had even more disposable income due to government stimulus checks. It was relatively easy to restart the export goods pipeline, so easy the ports have been backed up for weeks as containers arrived.

Manufacturing Lags

It is much more difficult to jump start the industrial side of the economy. Factories were shut down for weeks. Some of these factories had never been idled except for a few days at the end of the year for holidays. There are startup and maintenance issues with some types of equipment. Workers need to be recalled, and material and parts inventories need to be replenished.

In addition, there were significant health factors involved in restarting the factories. Social distancing, disinfecting, contact tracing and quarantines all impacted productivity. Some workers declined returning to factory jobs due to personal or family health concerns. While many employees switched to working at home, this is not an option for production workers. There is also a major issue with government stimulus and extended state unemployment benefits providing a disincentive for reentering the workforce. In some states, the hourly unemployment benefit is close to or greater than the average factory wage. This is causing a severe worker shortage in certain industries.

There are also problems acquiring imported parts. Mexico remained on lockdown weeks after the U.S. restarted. Overseas producers rebooted more quickly, however; the U.S. ports were flooded with containers of restocking consumer goods. This is causing gridlock and delaying the delivery of key industrial components to manufactures for weeks.

All these problems resulted in a dysfunctional supply chain. There are steel, aluminum and wood shortages, among others. Even computer chips for autos and trucks are scarce. There are component shortages in many industries which are slowing production and raising prices. My sources tell me that the problems are intensifying in February, with no relief in sight. One manufacturing expert says “So the supply chain has basically dissolved.” It’s difficult to determine what the true demand is coming out of the lockdowns, but it is readily apparent that we have a supply chain quagmire, the likes of which this country has not experienced since WWII.

A Wide Gap Between Consumer Demand and Industrial Supply

The great disparity between the rebound in consumer market versus industrial is illustrated by comparing orders for van trailers, those hauling consumer goods, and those for flatbed trailers, used for transporting industrial goods. For the 2020 September-December time period, van orders were up an astounding 160% over the same period last year. Flatbed trailers were up only 31% (still respectable).

The good news is that flatbed orders have shown a noticeable improvement starting in November and are accelerating in 2021. The ISM PMI for manufacturing remains at high levels indicating that demand is strong for manufactured goods and is growing. Now supply just needs to catch up.

The Future for The Industrial Sector Looks Bright

The supply chain clog will be cleared at some point due to the laws of economics and the profit incentives of free markets. It could take an extended time since conditions are still worsening. The vaccine should lower infection rates and allow many people to return to the workforce, including factory jobs. Also, as state unemployment benefits run out, the job numbers could spike. This should drive down unemployment, and with the reopening of the travel and hospitality sectors, give a welcome boost to GDP.

This post originally appeared in the FTR blog. For more information on FTR, the leader in commercial freight analysis and forecasting: FTRintel.com