As far as the eye can see, cargo trucks wait in long lines to enter the Port of Los Angeles as the port is scheduled to begin operating around the clock on Wednesday, October 13, 2021 in San Pedro, California.
Jason Armond | Los Angeles Times | Getty Images
As the epidemic recedes, it has caused long-term ill effects such as labor shortages, inflation and supply restrictions that have delayed but could eventually prolong the economy’s recovery.
Governments around the world spent trillions of dollars to cushion the impact of the sudden downsizing in the second quarter of 2020, but no one knew how the world would get back to work.
Initially, the US economy rebounded sharply, but one year later, third-quarter GDP grew by just 2%, well below initial estimates, due to uneven activity and a sharp disparity between supply and demand.
“What we are seeing is an economy with millions of individual decisions that have to deal with these big changes,” said Vincent Reinhart, chief economist at Mellon. “It’s a modern economy that’s getting more and more complex…it’s a very complicated machine to restart.”
Stores are short of merchandise, as ports are blocked and shipping has become a costly challenge. Businesses large and small are facing labor shortages that have resulted in orders being delayed or canceled. This has resulted in higher prices for available goods and with higher commodity prices, inflation has become hotter and more persistent than many expected.
The tightness of goods and labor is appearing throughout the economy, and consumers pay more for everything from meat to clothing. The national average price for a gallon of unleaded gasoline, for example, is $1.25 higher than last year, according to the AAA.
Consumers are reacting to higher prices, Reinhart said. In the third-quarter GDP report, consumer spending, which accounts for about two-thirds of the US economy, rose at a 1.6% pace, after jumping 12% in the second quarter.
“I think one of the most striking aspects of the earnings reports we’ve got so far for this quarter is that executives are pushing back the date they see supplies return to normal and I think we should listen to those individual responses,” he said.
Reinhart said the economy has fallen about a year from the recovery that many initially expected and that by the second half of next year, many of the supply and staffing problems should be easier to solve. By then, companies are expected to show fewer effects from supply chain disruptions or have found solutions to the remaining problems.
The supply problems affecting US companies are particularly difficult for small businesses, said Diane Sonic, chief economist at Grant Thornton.
“What really worries me is that the big companies in retail and technology will gain more market share over the small and medium-sized companies,” she said. One of the positives from the pandemic, Sonk said, is the increase in entrepreneurship as people start their new businesses.
“They are facing pressure on the margins as the big companies have the technology to beat it,” she said.
There are wild cards left that make the forecast uncertain, including the course of the epidemic itself. One of the biggest risks is political uncertainty, Reinhart said.
It is not clear how much spending Congress will approve or what it will target. President Joe Biden on Thursday presented a $1.7 trillion plan focused on social spending and climate.
“The idea of easing the federal stimulus is already happening,” Sonk said. “This will be significant as we go into 2022 because no matter what package is passed and approved, it’s all less than what was passed, so the private sector has to get the baton from the public sector.”
Government spending rose slightly in the third quarter, after declining in the second quarter. The sharp drop in federal spending was offset by a rebound in state and local spending as schools reopened.
Sonek said that federal spending is set to decline again in the fourth quarter, but she expects growth in the fourth quarter to be stronger.
“It’s going to be a strong fourth quarter. I’m looking forward to about 5% growth,” she said. Swonk said Halloween spending appears to be higher this year, and the quarter also includes spending for the Christmas holiday season. The question is what do we buy and what is not available and how much do we pay.
She noted that consumer confidence is improving and credit card spending has improved. Bank of America reported that its total card spending rose 19% over the two-year period for the week ending October 16.
One effect of the slower-than-expected economic recovery this year may be that activity that could have come at once is shifting to future quarters instead.
“The silver lining in the less buoyant growth profile is that it could lead to a more sustainable recovery,” JPMorgan economists wrote. “The stunning recovery from last year’s pandemic meltdown exposed the limits of oversupply in response to rising demand – as evidenced by manufacturing bottlenecks and multi-decade spikes in commodity inflation.”
Reinhart expects the fourth quarter to grow by about 3.5% and to reach 2 to 2.5% growth by the second half of next year. Swonk expects growth to remain higher in 2022, with 3.3% growth in the fourth quarter compared to the fourth.
Economists also expect inflation to remain above the Fed’s 2% target.
” Core inflation may continue to rise … some backlog at ports and problems with hiring truck drivers . This eases over time , ” he said . “Dealing with extra demand under supply, that’s what makes inflation higher.”
Higher inflation may mean that the Fed will act sooner than expected to end the zero rate policy. Traders are already pricing in up to three hikes next year, and the worry is if the Fed starts raising interest rates, it could slow the economy.
“Inflation matters when it distorts behavior, and it looks like it will continue to distort behavior into 2022,” Sonk said.
Swonk expects core PCE inflation, which the Fed is watching closely, at 4.2% at the end of the year on an annual basis and 3.1% at the end of next year, Swonk said. The CPI exceeded 5%, and the core CPI was 4% in September.
Wage inflation is expected to continue as employers attempt to entice or simply retain workers.
Sonk said employment should improve now that students are back in school, and parents can be freed to return to work. “The problem is that we are still in the epidemic,” she said. “The good news is we have more vaccinations and more immunity.”
But she said recent data from the Real Employment Lab shows the number of job vacancies could reach a record 11 million, or more, by the end of October. “Even with workers brought back, demand is outstripping supply,” she said.
Nonfarm employment has increased by 17.4 million since the drop in April 2020, but is still 5 million below the pre-pandemic level in February 2020.
Economists say too many retirees and too few immigrants to come to the United States are two factors behind the labor shortage.
“A lot of people thought that when we turned on the lights again in May 2020 and June 2020, that was the case and we didn’t get there at that time. Recruitment was delayed,” she said. “The longer these epidemic and epidemic distortions persist, the more workers will be permanently displaced.”