How demand is outstripping supply and hampering recovery

How demand is outstripping supply and hampering recovery
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The recovery from the coronavirus pandemic has thrown off the balance between supply and demand, creating political challenges for both the White House and Federal Reserve.

A flood of fiscal and monetary aid, an accelerated vaccine rollout and easing COVID-19 restrictions have primed the U.S. for a rebound few anticipated at this time last year. Analysts are confident that the U.S. will soon rebound to its pre-pandemic strength, with the American economy on track to expand at least 6 percent this year, the fastest pace in nearly three decades.

But with that growth has come growing pains.

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Businesses hobbled by the economic devastation and disruption of the pandemic are now scrambling to catch up to a sharp rebound in consumer demand.

Manufacturers are struggling to ramp up production after shutting down factories during the depths of the pandemic, leading to parts shortages, higher prices and shipping delays across the goods-producing sector. Bottlenecks for mechanical parts, computer chips, lumber, rental cars and even ketchup have hindered the ability to meet the new demand.

“Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” said Timothy R. Fiore, chair of the Institute for Supply Management’s (ISM) manufacturing business survey committee.

The ISM manufacturing price manager’s index for April came in at 60.7 percent, Fiore said Monday. The index fell 4 percentage points from March as depleted inventories and slowing delivery times weighed on activity, though it remained well above the 50 percent threshold for expansion.

Factories have also struggled to hire enough workers to keep pace, Fiore said, even with millions of Americans still out of work due to COVID-19. Similar issues have hindered the comeback of the restaurant and bar industry.

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Many economists say the imbalance is a fleeting, if frustrating, quirk of the coronavirus recession — a sharp, steep downturn caused by a health crisis that will reverse swiftly as the pandemic gets controlled.

“The change in behavior around the public health crisis should not be equated with a downturn caused by an inventory correction or a policy error by the central bank,” said Joe Brusuelas, chief economist at tax and audit firm RSM.

“The increase in demand we’re seeing will not look like anything any of us have experienced in our lives or career arcs,” he said, adding that the current economic situation shares similarities with the release of price and wage controls after World War II.

The supply shortages, however, have put a brighter spotlight on a widely anticipated but politically inconvenient jump in inflation as President BidenJoe BidenGOP report on COVID-19 origins homes in on lab leak theory READ: The .2 trillion Infrastructure Investment and Jobs Act Senators introduce bipartisan infrastructure bill in rare Sunday session MORE and Fed Chairman Jerome Powell make the case against pulling back on government support for the economy.

Inflation as measured by the personal consumption expenditures price index minus food and energy, the Fed’s preferred metric, rose to 1.8 percent year over year in March — up 0.4 points in a month but still 0.2 points below the central bank’s target.

Republican lawmakers and inflation hawks have cited the price increases in opposition to both Biden’s proposal of more than $4 trillion in infrastructure spending and the Fed’s refusal at the moment to raise interest rates before 2022 at the earliest.

“For poor and struggling families across the nation, like mine growing up, even a slight increase in the price of household items can be devastating and curb their ability to save and succeed,” said Sen. Rick Scott (R-Fla.) last month after a survey found rising inflation fears among Americans.

“It’s time for Biden to wake up, abandon his radical tax and spend agenda and focus instead on reining in our out of control spending and debt, and protecting American families.”

Fed leaders and White House economic officials have both expressed confidence that a brief jump in inflation this summer will ease as suppliers catch up to pent-up demand. The index will almost certainly accelerate over the summer, and both institutions have independently tried to tamp down concern about the economy overheating.

It’s unclear how quickly hard hit industries will be able to fill labor shortages. While COVID-19 has been suppressed enough to drive demand higher, prevailing health concerns and partial school closures are still limiting the supply of workers willing to come back.

Many Republican lawmakers and some business owners have blamed the extension of enhanced unemployment benefits signed by Biden in March for the worker shortage, arguing it disincentivizes work.

But many economists, like Brusuelas, counter that the pandemic is still the primary factor suppressing the job market. The situation is particularly dire for women between ages 25 and 54, who’ve fallen out of the labor market at a much greater rate than men of the same age.

“These women, unfortunately, who are primarily in charge of caregiving and education in our society are struggling with the most unfortunate Catch-22,” he said. “They stay at home and care and educate the children, or they go back to work. They can’t do both.”

Powell said during a Monday speech that soon-to-be released research from the Fed found that 22 percent of parents “were either not working or working less because of disruptions to childcare or in-person schooling.” Those numbers climbed to 36 percent for Black mothers and 30 percent for Hispanic mothers, he added.

“We will only reach our full potential when everyone can contribute to, and share in, the benefits of prosperity,” Powell said.