Consumer high demand drives supply shortage
The Associated Press
DETROIT — Take a step back from the picked-over store shelves, the stalled container ships and the empty auto showrooms, and you’ll find a root cause of the shortages of just about everything.
Even as the pandemic has dragged on, U.S. households flush with cash from stimulus checks, booming stock markets and enlarged home equity have felt like spending freely again — a lot. And since consumer demand drives much of the U.S. and global economies, high demand has brought goods shortages to the U.S. and much of the world.
Add the fact that companies are ordering — and hoarding — more goods and parts than they need so they don’t run out, and you end up with an almost unquenchable demand that is magnifying the supply shortages.
That’s where a big problem comes in: Suppliers were caught so flat-footed by how fast pent-up spending surged out of the recession that they won’t likely be able to catch up as long as demand remains so robust. That’s especially so because Americans, still hunkered down at home more than they did before the pandemic, continue to spend more on goods — electronics, furniture, appliances, sporting goods — than on services like hotels, meals out and movie tickets. All that demand for goods, in turn, is helping to accelerate U.S. inflation.
Unless spending snaps sharply back to services — or something else leads people to stop buying so much — it could take deep into 2022 or even 2023 before global supply chains regain some semblance of normalcy.
“Demand is completely skewed,” said Bindiya Vakil, CEO of Resilinc, a consulting firm that helps companies manage supply chains. “This has now become more and more painful by the day.”
One reason people may eventually stop spending so much is that everything simply costs more now. Consumer prices in the U.S. skyrocketed 6.2 percent over the past year as food, gasoline, autos and housing catapulted inflation to its highest pace since 1990. The laws of gravity suggest that the cumulative effect of so much inflation will eventually exert a brake on spending.
For now, though, manufacturers foresee no end to heavy demand — and no end to beleaguered supply chains or spiking inflation pressures. A chronic lack of computer chips has forced Ford Motor Co., for instance, to revamp its system of ordering parts that require long periods from order to delivery to try to address shortages.
“It’s highlighted that the “just-in-time” operating model that’s been prevalent in autos may not be the right operating model,” Hau Thai-Tang, Ford’s chief operations and product officer, told analysts.
Smaller companies, too, have felt compelled to build up as many supplies as they can so they can still make products. Moriarty’s Gem Art near Chicago, a family business for 40 years, has been stocking up on gold, silver and platinum to make necklaces and rings, desperate not to run out of supplies as holiday orders pick up.
“We’re ordering a lot more than what we actually have orders for — just in case,” said Jeff Moriarty, the marketing manager.
Even a normal post-holiday shopping lull, though it might help, isn’t expected to be enough to unclog ports, speed shipping traffic or allow factories to replenish inventories.
“The baseline expectation for improvement is around the middle of 2022,” said Oren Klachkin, lead U.S. economist for Oxford Economics. “But I think the risks of that happening later are fairly high.”
Though Americans have increasingly ventured out in recent months, the balance between spending on goods and services remains skewed. The pent-up demand that followed the economic recovery is still tilted toward goods like furniture and cars and less toward haircuts, concerts and restaurant meals. Though services spending has grown in recent months, it isn’t nearly enough to close the gap.
Since April 2020, consumer spending on goods has jumped 32 percent. It’s now 15 percent above where it was in February 2020, just before the pandemic paralyzed the economy. Goods account for roughly 40 percent of consumer spending now, up from 36 percent before the pandemic.
U.S. factories have tried mightily to keep up with demand. Production rose nearly 5 percent over the past year, according to the Federal Reserve, despite periodic ups and downs, including disruptions to auto production caused by chip shortages.
Imports have narrowed the gap between what America’s consumers want and what its factories can produce. From January through September this year, the U.S. imported 23 percent more than in the same period in 2020. In September, thanks to surging imports, the U.S. posted a record deficit in goods trade: Imports topped exports by $98.2 billion.
Voracious demand for goods has accelerated as more people have become vaccinated in wealthier countries. Yet in poorer countries, especially in Southeast Asia, the spread of the delta variant forced new factory shutdowns in recent months and crimped supply chains again. Only recently did it start to recover.
At the same time, many U.S. workers have decided to quit jobs that had required frequent public contact. This created shortages of workers to unload ships, transport goods or staff retail shops.
Ports clogged up. Last month, 65 ships waited off the California coast to be unloaded at the Ports of Los Angeles and Long Beach — two weeks’ worth of work. The average wait: 12 days. That has since worsened to 78 ships, with an average wait of nearly 17 days, despite around-the-clock port operations beginning in October.
Before the pandemic, ships had set arrival times and went straight to a berth for unloading, said Gene Seroka, the L.A. port’s executive director. Now, with Asian factory output at record highs, the port is moving record levels of goods. Yet it’s not enough to meet the demand.
Seroka doesn’t foresee the shipments easing even next year. Retailers have told him they plan to use the slower months of January and February — if they actually are slower — to replenish inventory.
As with ports, rail lines are moving more goods. Through early November, freight shipped by America’s railroads was up 7.5 percent from a year ago. Truck shipments were up 1.7 percent in September. Yet there aren’t enough drivers or trucks to move all the freight.
In China, too, manufacturers are struggling with shipping delays, container shortages and cost increases. Shantou Limei International Ltd., which makes children’s toys in the city of Shantou, expects sales to fall 30 percent this year because of delays and costlier shipping.
“The most serious problem for us is being unable to deliver goods on time because of the difficulties in securing freight containers,” said Frank Xie, the company’s general manager. “A lot of things have gone beyond our controls and expectation.”
Philip Richardson, an American who manufactures loudspeakers in Panyu, near Hong Kong, said orders have increased 400 percent. A key reason is increased demand from Americans and Europeans, who have gone on a home electronics buying spree. The price to ship goods to U.S. customers on a 40-foot cargo container, meantime, more than tripled in July.
“The customer has to bear it or cut back on orders,” Richardson said.
Song Wenjie, owner of Hand-in-Hand Electric Appliance Technology Co., a manufacturer of home appliances in Jiaxing, south of Shanghai, said that soaring cargo prices make it unprofitable to ship some goods.
“The combination of power outages and shipping delays might lead to a 20 percent fall in production this year, Song said.
Among European companies grappling with snarled supply lines is Shoe Zone, a British retailer that sources most of its footwear from China. Shipping container prices have jumped at least five-fold in 12 months, said Anthony Smith, the chief executive.
“This will continue to impact us for at least a further six months until the issues being experienced in the whole supply chain return to more sensible levels,” he said.