Economic Outlook | Fall 2021

Federal Reserve Chairman Jerome Powell believes the inflation we are seeing (CPI is up 5.3% year over year*) is, transitory or temporary. With the vaccine rollout earlier this year consumers shifted from service-based consumption to goods. The limited supply of goods available caused prices to rise. According to him, the higher prices we are paying for housing, energy, food and other goods should abate as the supply is increased. So, is the increase in prices temporary? In a September 28th press release, The Dollar Store announced they “…will begin testing additional price points above $1 in selected legacy Dollar Tree stores”. I believe this indicates that the retailer believes inflation may not be transitory, but more permanent. Let’s take a deeper dive into the factors causing this problem.

Limited Supply

Coming out of a pandemic one would expect costs to rise moderately. But, the cost to ship a container from Shanghai to Los Angeles increased from $2,000 to $20,000 in a year and a half!**. Additionally, according to the Wall Street Journal, on Sunday September 19 there were 73 ships waiting to unload cargo at ports in Los Angeles and Long Beach. According to Port of LA chief Eugene Seroka, the problem is not with port workers. “…truckers and warehouses haven’t added as much capacity as shippers, so unloaded containers are sitting at the Port for six days, rather than two, and at warehouse doors for seven or eight days versus three or four. The ship jam will not be cleared by Christmas.”**. There is perhaps no greater illustration of the result of this problem than in the car market. Because new cars need computer chips, and because those chips mostly come from overseas, there are many new cars waiting for chips that cannot be sold. We’ve also had a reduction in supply of used cars. Car rental companies typically dump their inventory to buy new cars each year. We had very few rentals in 2020, so car rental companies are not selling their cars. As a result, prices for used cars have skyrocketed, in some cases exceeding the sticker price for new cars!

Labor Issue

In his testimony before the house oversight committee on September 29th, Federal Reserve Chairman Jerome Powell stated, “We are not near full employment…” Some blame vaccination status, others point to generous unemployment benefits. Either way, the economy needs more workers. The issue is global. For example, in Great Britain the shortage of truckers delivering gasoline and groceries is so bad that Boris Johnson recently offered temporary visas to foreign truck drivers to combat the shortage. According to the New York Times, “So great is the concern that there has been speculation that the military could be called up to drive trucks”***.

Debt Issue

The headline issue here is the debt limit. According to Secretary Treasurer Janet Yellen, if the debt ceiling is not raised by Congress, we will run out of money on October 18th. Although the result of inaction by Congress would be catastrophic, that is exactly why they will act and why most investors are looking past this deadline. There is a bigger issue here. Some economists believe it is wise for a country to borrow money in times of economic slowdown (as we have done) to aid the recovery.

However, most economists believe that systemic debt (debt that can’t be paid down, even at full employment) is problematic. The most likely outcome of an increasing debt load is quantitative easing, or as I like to call it, printing money. As the US Treasury borrows money, the Federal Reserve buys their bonds and effectively lends them money. This process increases the money supply and ultimately debases the currency. As we come out of the crisis the question remains; will we have inflation in the future as the economy normalizes?

The supply and labor shortages should resolve themselves within the next several months, probably at higher prices and wages. The long-term resolution of our debt issue, however, remains in doubt.

Doug Lagerstrom

*US Bureau of Labor Statistics

**Barrons 10/4/2, Coping with the Cargo Crunch

***New York Times 9/26/2021