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
Interesting Don. Two points if I may:
ReplyDelete1. South Dakota never locked down any business. Never mandated masks. And therefore, is still going strong.
2. Now under a third term of the Elite Left, there will be no recovery. It simply does not serve its socialists goals. As you know 90% of the supposed COVID-19 economic stimulus relief Bill is nothing more than Payola. Yes, ONLY 10% goes to those harmed by the pandemic.
^ski