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Supply Chain Shortages and Inflation: How Bad Will the Disruption Become?

Summary:
As William Gibson famously said, “The future is already here – it’s just not very evenly distributed.“ And that appears to go double for our current supply chain crisis. It’s hit key sectors, above all autos, hard, but others seems to oddly unaffected.1 However, these problems are likely to both become more severe and persist longer than they should due to the poor responses of our elites. Some of these disruptions are due to things outside US control, like chip makers being whipsawed by carmakers who slashed orders then wanting to go back to their old levels double plus quick when the chipmakers are plenty busy thanks to electronics company orders, and widespread power outages in China. On the one hand, Biden Administration officials have urged consumers to buy earlier for Christmas

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As William Gibson famously said, “The future is already here – it’s just not very evenly distributed.“ And that appears to go double for our current supply chain crisis. It’s hit key sectors, above all autos, hard, but others seems to oddly unaffected.1

However, these problems are likely to both become more severe and persist longer than they should due to the poor responses of our elites. Some of these disruptions are due to things outside US control, like chip makers being whipsawed by carmakers who slashed orders then wanting to go back to their old levels double plus quick when the chipmakers are plenty busy thanks to electronics company orders, and widespread power outages in China.

On the one hand, Biden Administration officials have urged consumers to buy earlier for Christmas (particularly toys because China). Worse, the UK is suffering food shortages and citizens have been warned they might not be able to procure a Christmas dinner. Americans are feeling the pinch because two of the categories they buy most often, food and gas, are seeing big spikes. From Bloomberg:

Consumers around the world are about to get socked with even higher prices on everyday items, companies from food giant Unilever Plc to lubricant maker WD-40 Co. warned this week as they grapple with supply difficulties.

The maker of Dove soap and Magnum ice-cream bars jacked up prices by more than 4% on average last quarter, the biggest jump since 2012, and signaled elevated pricing will continue into next year. A similar refrain came from Nestle SA, Procter & Gamble Co. and Danone SA, whose products dominate supermarket aisles and kitchen cupboards.

“We’re in for at least another 12 months of inflationary pressures,” Unilever CEO Alan Jope said in a Bloomberg Television interview. “We are in a once-in-two-decades inflationary environment.”

Read this part carefully:

Companies are facing a dire mix of supply-chain challenges, as well as higher costs for energy, raw materials, packaging and shipping. While most consumer-goods makers reporting results this week expressed confidence that they’ll be able to limit the long-term hit to profitability, that means the pain passes to consumers, upping the squeeze on pockets as Christmas approaches.

Ahem, “long-term hit to profitability”? Analysts don’t care about long term. This is code for they are passing through their price increases close to, if not entirely. And that’s disgraceful given that corporate profit share has been at a record share of GDP for years, more than double the level in the early 2000s.

The big “on the other hand” part is the Administration is doing almost as much wrong as it possibly could. First, it has allowed itself to take ownership of this supply chain problem, when it can do almost nothing to increase production or clear delivery bottlenecks. So Team Biden is managing to further diminish its rapidly sinking credibility. Why not toss the hand grenade back to business, where it belongs, by forming a task force? Or put Harris in charge? One thing she appears to be good at is getting her pet projects overlooked by the press.

It is almost laughable, for instance, that the Administration asked chip makers to report on their inventories. We predicted they wouldn’t get the data, and that’s looking to be the case.2. And more important, what would they do with it? They can’t make any chip makers behave differently even if they were to be open kimono.

Similarly, the press is widely reporting on a Biden brain fart, that of having the National Guard help with “supply chain bottlenecks“. Actually it’s worse than a brain fart, because it’s proof that the Administration believes unglamorous essential jobs require no skill. Per the Wall Street Journal:

“The answer is yes, if we can’t move—increase the number of truckers, which we’re in the process of doing,” Mr. Biden said during a CNN town hall on Thursday when asked about deploying the National Guard.

Before we get too excited, at least some alert members of the press realized the Biden remark made no sense:

But let’s take it at face value. National Guardsmen driving trucks? Seriously? You need a commercial license to drive a truck. Maybe a state would waive the requirement for National Guardsmen to operate a truck with their state (moving commercial goods is a commercial use; you can’t pretend this is an emergency like hurricane relief). But having a National Guardsman drive any private truck without a commercial license would violate its insurance policy. No truck owner, whether owner operator or lessor, would allow that. And I doubt the Biden Administration was planning to commandeer private sector trucks. That gets you right into a Fifth Amendment unlawful taking, for starters.

And as Lambert pointed out in Water Cooler, there is something Biden can do to at least somewhat alleviate the mess at ports, but he’s refusing to do that:

“Biden Races Clock and Holds Few Tools in Supply-Chain Crisis” [Bloomberg]. Amazing nugget: “Trucking is an industry long beset by grueling hours and declining pay. Few know those hardships better than port truck drivers. Port truckers are typically independent contractors, without the benefits and protections of unionized transport sectors or even major companies with shipping divisions, like Amazon.com Inc. Their jobs require them to line up for hours to pick up cargo, and they’re paid only when they move it. ‘The port truck driver, for decades now, has basically been the slack adjuster in the whole system,” said Steve Viscelli, an economic sociologist with the University of Pennsylvania who studies labor markets and supply chains. The entire system, he said, is built around free labor from truck drivers as they wait for containers. The Teamsters union says Biden should try to encourage organization of port drivers so that they can bargain for better pay and benefits. But the president has instead focused on trying to produce new drivers by streamlining licensing. The White House says an average of 50,000 commercial drivers licenses and learners permits have been issued each month this year, 14% above 2019 and far above 2020 levels, when the pandemic shuttered training programs.” • And then the newly licensed drivers discover they have to work long hours for nothing, and move on, right?

Second, as we know, the Administration is making the supply chain/inflation crisis worse through its insistence on strong-form, as in vaccine-only, mandates. There are plenty of choke points in the economy, such nursing staff and public transit workers, that a few job losses has a disproportionate impact. And as we have pointed out here, now that Delta has become the dominant variant, the vaccines do little to limit contagion, as opposed to tamp down severe cases and deaths. It would be far better to have regular testing in all workplaces with close working conditions and/or poor ventilation. But the pushing of the magic vaccines as the only solution continues.

Even though mandate backers argue few have been fired for non-compliance, that’s not the right metric. Anyone with self preservation instincts would leave for a new job before the drop dead date. So the Administration’s misguided approach to vaccinations is at least at the margin, and perhaps more than that, adding to supply chain/inflation pressures.

Now what could Biden do? While he can’t do much about the supply chain mess, he could do a lot more about food and consumer goods inflation. Notice that the big companies (and you can be sure the distributors too) plan to and probably are preserving their profit margins?

Biden should put them in his crosshairs.

Imagine if he got up and gave a presidential address that more or less said:

Americans, particularly hourly employees like our essential workers in healthcare and the food industry, are hurting due to inflation as big companies are still raking in record profits. This has to stop. The Federal government spent $X trillion last year bailing out American businesses. No profiteering when your survival and bottom line depended on taxpayer support. We expect all of you to curtail your profits for the next two quarters so middle class and poor Americans don’t have to sweat if they can pay the bills over the holiday season. We also expect corporate executives to moderate their bonuses out of respect for the sacrifices, including the sacrifice of their lives, that our essential workers have made during this Covid crisis.

And before you say, “What about the stock market?” I say to you if any investor is dumb enough to sell during a short-term, deliberate profit curtailment, others will be smart enough to buy on this dip, and they’ll come out winners.

I am instructing the Commerce Department and the Transportation Department to develop detailed profit analyses which we intend to make public.

Even if this didn’t work in embarrassing the big companies into behaving better, Biden’s approval ratings would spike.3 And he could specifically try to embarrass whoever pays for port drivers to pony up for the waiting time or else he would thrown his full weight behind their unionization drive.

Let’s turn to a related issue out of our opening Gibson quote, that the supply chain/inflation crisis is not evenly distributed. Admittedly I don’t buy much more than some food and gas these days. I haven’t seen that much in the way of increases in what I buy for me or the household or the aides ex gas (I do see mass market items like crackers and cookies have gone up but the bigger increase were via package shrinkage; veggies and organic yogurt, eggs, and oddities like kombucha are flattish, while cheese and butter and some seafood items have gone up; there have been some price increases and portion-size shavings at restaurants, but more in NYC than here). At least here, I haven’t seen shortages (save the chip aisle looking bare right before football games, which is normal here, and no Veuve Cliquot for nine months) except on a very short-lived basis with paper goods; it was way way way worse during Peak Covid.

By contrast, drug supply shortages are worse than last year. Nevertheless, I am surprised at how dire things look to IM Doc, who is in a rural but very affluent pocket of flyover. I am in a much less affluent pocket in a medium-sized city. And I didn’t see anything like this in Maine a month ago (frequent trips to two grocery stores) nor did I hear of anything like this when in New York to see MDs. Is the local experience different due to being less remote? Or are other readers seeing as many shortages as he does?

From IM Doc:

About inflation……..

I was raised in a very large extended family on an ancestral family farm.

As a kid, I listened to my grandparents and uncles tell stories of what it was like in the Great Depression. As I got older, my grandfather would pound into my head multiple things that happened to him as a young man that were harbingers of the bad times to come. That was deflation. As a child myself, my family lived through the oil shock and the stagflation of the 1970s. I think all of us over 50 have living experience with this type of thing.

I will tell everyone here – my red alert signals planted by my elders deep in my brain have been going off full blast this entire year.

I am unable to procure a windshield for my late model van. At any price. There are just none available.

My neighbor’s Ford truck has been disabled since August and unusable because a small part is needed to fix it and is unavailable.

There are multiple buildings all around in various stages of building that have just been abandoned for want of supplies or supplies that are now all of a sudden prohibitively expensive. Some have clearly been left to rot.

We have kids in my kids’ school whose parents were already marginal financially whose children now just have no lunches to eat at these prices in the grocery store. And the school lunches have turned into a horrifying joke. My wife and multiple other parents are making extra for these kids every day.

We have in our part of the country seen the cost of basic staples explode in price just in the past month – sometimes at a very scary rate.

We are seeing large swaths of the local stores empty of many things. Large empty rows of things like canned vegetables, frozen vegetables, and just forget about large groups of various pre-processed foods ( our family does not eat this type of thing anyway). The sections with sodas ( yet another thing we do not use) are just empty most of the time except for the Coca Cola products which it seems everyone around my place are boycotting.

And many essentials are non-existent, for example Kerr and Ball canning products.

And like no time in my career, we in the office are having to juggle all kinds of medications and prescriptions. Many pharmaceuticals are just simply not available. Especially all the various types of long-acting insulin (Tresiba and Tuojeo are the worst), rheumatology drugs (Enbrel and Humira), asthma inhalers and many types of antibiotics.

I am somewhat comforted that my wife and I saw the writing on the wall several years ago and moved to the vast expanse of rural America. We have just procured half a cow from our neighbor for example and have on our property chickens galore and abundant eggs every day. Just like my grandparents taught me to do – we have been canning and preparing all summer. Large containers of flour and sugar are stored and ready. We are about as prepared as anyone in our family.

Yet – I never dreamed I would hear an American administration just so glibly blow off the entire situation – Psaki – “Everything is great – people are just buying a lot of stuff” and “Get over it, maybe no treadmill this year”. I just cannot believe what I am hearing. I know from talking to my patients that there are already lots of people already suffering – and this tripe is what is coming out of Washington? First we were blessed with the visage of an American president smiling with glee announcing that many millions of Americans were about to be fired – and now this? I truly no longer recognize my country. I have serious reservations that any of our leaders in either party have a clue or the will to do anything about this impeding situation.

We at least agree on appalling leadership even if we don’t seem to be getting the same signals on current conditions.

But we’ll close on a less dour note: the current shortages and price squeezes may usher in price breaks down the road. From vlade:

My wife’s parents live nearby Skoda’s factories. There are massive parking lots full of semi-finished cars, which I guess are waiting for the chips to be delivered, and the cars completed. I’d expect that the cars that sat for half a year on the parking lot can’t be sold at full price though, so as there are car shortages now, it’s very likely that in a year or so there will be an oversupply.

_____

1 Yours truly eats more dietary supplements than food and I’ve seen nothing amiss there, not even much in the way of price increases.

2 This entire exercise is embarrassing. The US lacks the authority to get foreign manufacturers to cooperate. The linked Reuters article verges on disinformation, since the fact that the Administration is now talking about having to compel producers to get data means it knows it won’t get much if any and is trying to engage in porcine maquillage.

3 Indeed, Biden could play this entirely cynically, as the Obama administration did with bank servicers during the foreclosure crisis. Quoting Georgetown law professor Adam Levitin:

So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser.

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