The Week in Review: August 30, 2021
Supply and Demand
One of the broadest and simplest measures of the economy is supply and demand. Let’s frame this in another way: What is the supply of goods and services versus the demand for goods and services?
In a “normal” economic cycle, consumer and business demand declines, which leaves the economy with too much supply, and layoffs and production cuts occur. This is a recession.
Fiscal stimulus and falling interest rates help stimulate demand, which encourages businesses to boost supply, and a new economic expansion takes hold.
In some ways, today’s cycle is mimicking prior cycles, as rising consumer and business demand leads to increased hiring and production. But there are important differences.
For example, booming demand and the strength and speed of the economic recovery have surprised most observers, leaving many producers, which create supply, flat-footed.
An article in last Thursday’s Wall Street Journal, “Why Is the Supply Chain Still So Snarled? We Explain, with a Hot Tub,” sums up the problem:
Utah manufacturer Bullfrog Spas depends on a complicated network to bring materials from across continents and oceans. The pandemic put it out of whack.
“It can take up to six months for a customer to get a hot tub, up from a few weeks before the pandemic,” The Wall Street Journal reported. “Parts come from seven countries and 14 states and travel a cumulative 887,776 miles to make one hot tub, the company estimates.”
The graphic below helps illustrate the problem.
The production of goods has failed to keep up with strong demand. Note the surge in spending tied to stimulus checks issued in January and March. Retail sales are up over 15% from January 2020, but production remains just below the pre-pandemic reading.
Imports have helped make up some of the difference, but shortages and delays abound.
We are seeing rising production, and supply chains are slowly mending, which should help ease some distortions. But it has been happening at a slow pace.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
1. The last time the S&P had a pullback of 5% or more was October 2020. Since 1929, the S&P has experienced only 12 other streaks of nine months long like this one. —Seeking Alpha, August 16, 2021
2. After the unemployment rate for younger workers shot up to 32% last summer, the jobless rate for teens dropped to 9.6% this May, the lowest it’s been since 1953. —Morning Brew, July 5, 2021
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