See An Insider Explains the Supply-Chain Crisis: Consumers flush with cash and pandemic restrictions combined to drive demand for goods through the roof. Economist Phil Levy doesn’t see a return to normal until at least 2023 by Tunku Varadarajan of The WSJ.
He interviewed Phil Levy, chief economist for Flexport, a San Francisco-based tech company for global-logistic services. I like the point he makes about ports not being able to handle the surge in demand. It is like a restaurant that is sometimes so crowded you can't get in. Why not build it bigger? It might be too costly because that extra room might sit empty most of the time. Also, he makes a point about inelastic supply for some goods. That is a steep supply line, so any increase in demand will mean big price increases Excerpts:
"The pandemic is at the root of the supply-chain crisis. Covid-19 has
led to work disruptions at factories and ports in China, with
quarantines and shutdowns hitting the production and movement of goods.
Mr. Levy cites the monthlong shutdown owing to Covid cases in May 2021
at the Chinese port of Yantian, which handles a third more volume than
the Port of Los Angeles.
“It’s one of the major Chinese ports. And every time you shut
down at one of those places, you’re interrupting the flow of
containers.” Buildups and backlogs accumulate. “How do you ever work
them down?” Ports have fixed capacity: “You can’t suddenly process twice
or three times as many ships once a lockdown is lifted.”
Ninety percent of all exported goods move over the ocean. These
include not only finished goods but also parts. “So even if you’re
manufacturing in the U.S.,” Mr. Levy says, “the odds are you’re using
some imported parts.”
Ports are built “so you can just meet peak demand.” It’s too
expensive to build at excess capacity, “because then most of the time
you’d have lots of extra stuff sitting around.” The peak season is
August through November, “when it’s, ‘How do you stock store shelves for
the holidays?’ ” The problem is that a system that can “barely handle” a
normal peak season has seen “above peak demand for about an entire year
and a half,” placing it under “a cumulative strain it wasn’t really
built for.”
A major cause is what Mr. Levy calls “the defining economic
characteristics of the pandemic.” There has been a “marked tilt” in
buying behavior, a shift from services toward goods. “We still buy more
services than goods, don’t get me wrong,” he says. But whereas U.S.
consumers spent 69% of their money on services before the pandemic and
31% on goods, the breakdown now is more like 65% to 35%.
The pandemic recession was unlike previous ones. “One of the
ways that economists would normally have defined a downturn is that you
get a decrease in production and a decrease in income.” But American
pocketbooks “were a lot more full than they normally are with a
downturn.” It’s not hard to see why, he says, pointing to the Cares Act
in March 2020 and other government cash infusions in January and March
2021, “which were directly putting money in. Pretty much all the
movements in income track the movements in government transfers.”
This meant that the pandemic “didn’t have the effect that you
often would’ve expected with a downturn, which is people don’t have
money to spend. They did. And then their preference of what they spend
it on tilted towards goods.” Some of this income was saved, too, so that
consumers were flush even after government support ended.
Demand for durable goods—those, like Mr. Levy’s oven, that last longer
than three years—dropped briefly after the pandemic started, then “shot
right up in the early summer of 2020.” So while U.S. gross domestic
product gradually recovered in the second and third quarters of 2020,
the recovery in U.S. imports was much more rapid—reaching pre-pandemic
levels by October 2020 and continuing to increase."
"Whereas goods consumption previously “might move up or down by 0.2%, here you were seeing moves that were 10, 15 times that.”"
"As consumption shifted to goods, Mr. Levy says, the initial burst was
in durables. That’s one reason why Federal Reserve Chairman
Jerome Powell
described inflation as “transitory,” a judgment he’s since
withdrawn. “ ‘Transitory’ was transitory,” Mr. Levy chuckles,
apologizing for the labored joke—“trade economist humor,” he says. “We
find it where we can.”
Mr. Levy, who was a senior economist for President
George W. Bush’s
Council of Economic Advisers, isn’t entirely unsympathetic to Mr.
Powell’s initial thinking. “It was based on what we saw with the surge
in durables. If everybody had moved up their purchases of sofas or
exercise machines, and so forth, by definition those aren’t the things
you buy month after month after month. If I buy three years’ worth of
sofas all in one year, our expectation is this will be short-lived.”
The durables spurt started in May 2020, and by month’s end they
were “right back to what they were pre-pandemic.” They rose to 10%
above that level in June 2020. “By the time you got to about March 2021,
durables consumption was about 35% higher than it had been.” That was
the peak; now it’s 18% above pre-Covid levels.
But there’s been another twist. The buying of nondurables—goods
that last less than three years—has shot up. After a spurt in March
2020—remember the panic buying of toilet paper—nondurable consumption
went down in April 2020, then made what Mr. Levy calls “a slow, steady
climb to where they are about now—13% or so above pre-pandemic numbers.”
With “inelastic supply and a big surge in demand, prices have to go
up.”"
"A return to previous patterns of consumption would also reduce the
strain on the supply chain. Yet for consumer demand to abate, people’s
buying power would need to decline, or there would have to be a shift
back toward buying services."
"The supply-chain crisis, Mr. Levy contends, has no parallel in history.
We’ve had shocks before, such as the oil crisis of 1973. But
“global-trade liberalization and distributed specialization,” allied to
an ease of shipping and transport, fueled by ideas like “just-in-time
inventory”—that’s all new."
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Ventilators and the law of increasing opportunity cost (2020)
Coins are more valuable right now than they normally are (2020)
Does socially responsible investing make the world a better place? (2019)
Supply, Demand and the High Price of Vanilla (2019)
