World After Countless QEs: A Shortage Of Everything

In last press conference, Jay Powell confirmed that the Fed is setting off on a historic experiment: welcoming a conflagration of red-hot inflation for an indefinite period of time in an overheating economy, with the underlying assumption that it’s all “transitory” and that inflation will return to normal in a few years, and certainly before 2023 when the Fed’s rates will still be at zero.

There is a big problem with that assumption: while FOMC members, most of whom are independently wealthy and can just charge their Fed card for any day to day purchases of “non-core” CPI basket items, the vast majority of the population does not have the luxury of having someone else pay for their purchases or looking beyond the current period of runaway inflation, which will certainly crush the purchasing power of the American consumer, especially once producers of intermediate goods start hiking prices even more and passing through inflation.

Many readers may not recall, but one such instance of “transitory” inflation that proved to be anything but and led to the infamous Volcker Fed and its double digit rate hikes, was the price of oil which took off in the Arab oil embargo and then refused to come back for over a decade.

To be sure, the Fed is certainly right that there has been turmoil within virtually all supply chains: one needs to only read what the respondents to the most recent mfg ISM said to get a sense of how bad it truly is:

  • “Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.” (Electrical Equipment, Appliances & Components)
  • “Supply chains are depleted; inventories up and down the supply chain are empty. Lead times increasing, prices increasing, [and] demand increasing. Deep freeze in the Gulf Coast expected to extend duration of shortages.” (Chemical Products)
  • “The coronavirus [COVID-19] pandemic is affecting us in terms of getting material to build from local and our overseas third- and fourth-tier suppliers. Suppliers are complaining of [a lack of] available resources [people] for manufacturing, creating major delivery issues.” (Computer & Electronic Products)
  • “We have seen our new-order log increase by 40 percent over the last two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.” (Primary Metals)
  • “A sense of urgency is being felt regarding new orders. Customers are giving an impression that a presence of stability is forthcoming and order flow is increasing.” (Textile Mills)
  • “Prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.” (Wood Products)
  • “We have experienced a higher rate of delinquent shipments from our ingredient suppliers in the last month. We are still struggling keeping our production lines fully manned. We anticipate a fast and large order surge in the food-service sector as restaurants open back up.” (Food, Beverage & Tobacco Products)
  • “Steel prices have increased significantly in recent months, driving costs up from our suppliers and on proposals for new work that we are bidding. In addition, the tariffs and anti-dumping fees/penalties incurred by international mills/suppliers are being passed on to us.” (Transportation Equipment)

Even BofA’s Chief Investment Officer, Michael Hartnett, threw in the following “heard on main street” anecdote in one of his recent Flow Show notes:

Our worldwide supply chain, and ability to provide products and services to you, is being significantly impacted by increased prices resulting from labor and raw material shortages, escalating raw material prices, manufacturing delays and transit interruptions. Stated directly, our costs are increasing and are much more volatile than in the past.” – Mar 3rd price increase notification to CA real estate developer.

The problem has become so acute that several of the regional Fed business surveys asked specific questions about supply chain disruptions in the last few months. As the chart below shows, a majority of manufacturing firms report that supply chain disruptions are currently negatively affecting production. Additionally, 38% of businesses in the Atlanta Fed’s survey reported that supplier delays were moderate to severe, while 49% of Dallas Fed respondents reported that disruptions had meaningfully raised input prices. In the NY Fed’s Empire Manufacturing Survey, 59% of respondents reported finding new suppliers due to supply chain disruptions, while 58% reported that they had started building extra inventories. Overall, these measures suggest that supply chain disruptions are dramatically and adversely impacting business operations, and leading to far higher prices.

Digging deeper, Goldman then notes that although supply shortages have affected a wide variety of products, in most cases the root causes are the same:

  • First, manufacturers were caught off guard by a faster-than-anticipated recovery in demand and hadn’t ordered enough inputs in advance to meet production needs.
  • Second, the increase in goods demand while transportation services are limited by the virus has led to an undersupply of shipping containers and congestion problems at West Coast ports, resulting in lengthy shipping delays.

So first the bad news: even if the current burst of inflation is truly “transitory” – as the Fed vows, staking what little credibility it has that inflation will reverse in the second half of 2021 – Goldman concedes that “neither of the above two problems should abate soon” since fiscal support for household income should keep goods demand elevated and the virus should continue to disrupt the supply of international goods transport services until widespread inoculation in the US and its trade partners normalizes both goods demand and supply.