I went out for pizza the other night, but I had to eat it in my car.
That’s because Frank Pepe’s in Manchester, Connecticut, had this sign on the door.
“Please note: Dining room closed after 4pm today due to lack of staff.”
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 that we are living in a world where shortages of supplies – employees, oil, semiconductors – are commonplace and impact the economy to a degree we haven’t seen in decades. The implications for inflation, Fed policy, a possible recession and our global well-being are immeasurable.
Supply restrictions are everywhere these days, some Captain Obvious, some more opaque. In some cases, economic crises are caused by drops in demand. This could 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-April 2020 COVID recession when people didn’t venture out to buy things.
Supply shocks can also cause downturns or recessions. “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 that led to an increase in oil prices in 1973 and the second was the [1979 Iranian revolution] which also caused an increase in oil prices. This time, the spike isn’t just in an oil crisis, it’s natural gas, food, fertilizer, industrial products and semiconductors.”
Since the onset of COVID, the global economy has been hit by supply and demand shocks, which have angered leaders across the world. The roughly $5 trillion of stimulus our government has put into the economy has boosted demand for cars, homes, and meme stocks, etc. Given the aforementioned supply constraints, it is difficult to remember a time when supply and demand mismatches were so pronounced.
One effect has been inflation, currently at 8.2% – still hovering close to the 40-year high of 9.1% we saw in June. Can we discern how much of this comes from the demand side, how much from the supply side? Phil Levy, chief economist at Flexport, says that while Europe’s energy woes suggest a supply shock, too much demand is the bigger problem.
“Most of what we are seeing with [higher] prices come from demand, which has increased – and supply can’t keep pace,” says Levy.
The causes of supply deficiencies
Let’s break down these supply shortfalls, the causes of which include the pandemic, the massive layoff, Russia’s invasion of Ukraine, deglobalization and climate change – or some combination of these factors.
Putin’s invasion of Ukraine has disrupted supplies of wheat, corn and grains and even sunflower seeds. His dominance over Europe’s natural gas supplies, 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 manufacturing stops. Winter is just 60 days away, and heat rationing is a distinct possibility.
This is a global supply problem. How about this recent Wall Street Journal headline: “New England at risk of winter blackouts as gas supplies tighten Network officials warn of tension as region competes with European countries for gas shipments liquefied natural”.
Speaking of New England, climate change could wreak havoc on supply, as you might find out this Thanksgiving Day when your cranberry sauce is prohibitively expensive or even non-existent due to shortages. Because? The 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 larger scale.
Chip shortages have also hit industries around the world — including the automotive sector, as GM CEO Mary Barra told me recently. But it’s not just large corporations that are being hit by low chip supplies. My alma mater, Bowdoin College, recently ran into supply chain issues while trying to complete some buildings.
“Due to chip shortages, the companies that make the controls for our AV systems have announced shipping delays of 12 to 24 months, and we are being warned that network equipment will be similarly challenged,” Michael Cato, Chief Information Officer . “This complicates our planning in a number of ways, including time for financial budgets and navigating the multi-year timeline of construction projects.”
There may also be a shortage of workers to complete these projects. The big layoff has hit many companies, but it is also affecting the government. John McQuillan, CEO of Triumvirate Environmental, which disposes of commercial and hazardous waste, has a business that requires government permission — a process he says has slowed.
“We want to increase our processing capacity, but you have a lot of regulators who have resigned. More experienced people tend to be older. I have four or five things pending in the US, Canada and Mexico right now. And every case I hear is, ‘We’re understaffed, the key person has retired, or we’re waiting to hire someone for that position.’”
What’s in our anti-inflation toolkit?
What can be done about supply problems? Remember, they are a significant cause of inflation and possibly recession. Ideally, the Federal Reserve can moderate inflation by raising interest rates. Unfortunately, the Fed’s traditional tools of raising interest rates and shrinking its balance sheet are aimed at containing demand, not increasing supply. This does not mean that policymakers and the private sector are powerless.
Michael Spence, Nobel laureate in economics and professor emeritus at Stanford, writes in Project Syndicate that higher rates and the withdrawal of 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 calls for the removal of tariffs. He also says efforts should be made to improve productivity. “Many sectors – including the public sector – are lagging behind 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 advocates expanding the adoption of COVID-19 vaccines to reduce labor and manufacturing supply shocks by providing additional support for care. children and households to increase labor force participation and lowering limits on working-age immigration to increase labor supply.
“Actions like these are not part of the standard anti-inflation toolkit, but given the changing economic environment, they should be,” says Jarsulic.
In fact, all of these supply problems can produce a silver lining, argues Financial Times columnist Rana Foroohar in her new book “Homecoming, The Path to Prosperity in a Post-Global World,” which notes: supplies of recent years now outlast the oil embargoes of 1973-74 and 1979 combined. This is not a blip, but the new normal.”
The book argues that “a new era of economic location will bring together place and prosperity. The location-based economy and a wave of technological innovations now make it possible to keep operations, investments and wealth closer to home, wherever that may be.”
We hope Foroohar has written the silver primer.
This article was featured in a Saturday edition of the Morning Brief on October 22nd. Receive the Morning Brief directly in your inbox Monday through Friday at 6:30 am ET. Subscribe
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