Friday , June 18 2021

Economic demand is back. Supply is problem

What a difference a year makes for many corporate bosses in advanced economies. Some 12 months ago, they were dealing with the sudden and brutal disappearance of demand for their products. Today, demand is not a problem for most of them; it is surging. Rather, they are struggling to secure supplies, including the raw material inputs and workers needed to meet this demand — the consequences of which will determine much more than corporate success.
Strong consumption and investment, enabled by economic reopenings and solid corporate and household balance sheets, are bolstering aggregate demand to a degree that has surprised many, be they executives, economists, policy makers or Wall Street analysts. It is a phenomenon that is likely to persist in the months and quarters ahead, especially in those countries that are able to contain Covid-19 infections, vaccinate many citizens and guard against new variants of the virus.
The supply side is much more of challenge. Indeed, it is quite a mess.
Bottlenecks and other rigidities are disrupting many supply chains. Shipping, including the availability of containers, has become much harder to secure. Covid outbreaks in certain countries that are embedded in global supply chains — such as Bangladesh, India and Vietnam — and geopolitical uncertainties, including periodic tensions between China and the US and Europe, add to the headaches facing those not just trying to get raw materials to their factories in a timely and cost-effective manner but also to meet seasonal demand for their final products.
Compounding that issue is the seemingly puzzling labor shortage which resulted in the biggest data forecasting error on record for US nonfarm payrolls. Already, and McDonald’s have raised entry-level wages as they try to counter a growing shortage of workers. Many other companies are sure to follow. This may help attract some people who are benefiting from unemployment benefits back into the workforce, but it is unlikely to overcome different factors that keep potential workers out of employment such as lack of child care, closed schools and skill mismatches.
Seeking to protect their profit margins, many companies will be tempted to pass the higher input costs through to final prices. The likelihood that such price increases will persist is high given buoyant demand and the Covid-related industrial concentration that has protected and, in some cases, enhanced many companies’ pricing power. As a case in point, Warren Buffett remarked recently that many companies have raised the prices they charge Berkshire Hathaway and that his own companies are increasing their prices. All of this is sticking. Understanding these dynamics is critical not only for corporate leaders but also for economists, Wall Street analysts and policy makers. One big lesson from recent big data misses — especially the jobs report and consumer price index for April — is that all have to pay much more attention to the aggregation of company- and sector-level evidence rather than resorting to broad top-down proclamations.
When it comes to policies, the multiplying supply-side disruptions make it even more important for Congress to move urgently in considering the infrastructure proposals put forward by the Biden administration. Not only do they try to improve the functioning of supply chains and increase productivity, but they also contain measures to encourage higher labour force participation and reduce the problem of skill mismatches over time.


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