A worker operates a forklift to move bundles of Hampton lumber for a shipping job at Burton Lumber in Salt Lake City, Utah on Thursday, May 6, 2021.
George Frey | Bloomberg | Getty Images
The US economy is trying to restart its engine after slipping into its deepest recession in generations, but a host of supply chain constraints threaten the country’s recovery.
The country is facing significant shortages in everything from labor to semiconductors, lumber and packaging materials. Not even swimming pools can be counted this summer as there is little chlorine left in the US. The scarcity left and right not only prevents the economy from achieving its full potential, it also raises fears of higher inflation as companies are forced to raise prices in the face of low supply.
“This shortage of workers and non-workers will affect the speed at which the economy recovers,” said Barclays director of US economic research, Michael Gapen. “Work and non-work assignments are additions to production. You need both. If I can’t get my semiconductors to make my cars, I don’t necessarily have to hire more workers.”
The US labor force participation rate remains well below pre-pandemic levels as many Americans don’t have to go back to work yet. This is partly due to generous unemployment benefits and childcare obligations.
In the meantime, manufacturers are struggling to catch up with the surge in demand in view of the shortage of supply for components and raw materials. This has prevented much of the economy from recovering from housing to services, technology, automobiles and leisure.
“This is going to be a longer process than when he comes in,” said Gapen. “With the world economy recovering at an uneven pace, it is likely that the US economy will do the same. There are still some problems in the system.”
“10 million jobs are missing”
While the labor market is poised to retreat, there appears to be a shortage of available labor to continue the big recovery.
The hiring of staff in April was a huge disappointment. The number of non-farm employees rose by only 266,000 compared to a Dow Jones consensus estimate of 1 million jobs.
“This is a labor market that is 10 million jobs short of where it should be. But unlike the normal shortage we have, I think it is as much a labor shortage as a labor shortage,” said Jason Furman, Harvard University economist and former advisor to the Obama administration.
Companies have trouble hiring employees if the risk of Covid infection persists. Federal unemployment benefits, as well as childcare obligations, where many schools are still closed, could prevent many Americans from re-entering the workforce.
The labor force participation rate fell to its lowest level since 1973 in April 2020, when the pandemic pushed large numbers of workers out of the labor market. While the rate has increased in the following months, it is still stubbornly below pre-Covid levels – 61.7% in April versus more than 63% before March 2020.
“We have record vacancies, we have workers who vote for their confidence in the labor markets with near-record dropout rates,” said Furman. “If you look at April, it seems like there were about 1.1 unemployed for every vacancy. So there are a lot of jobs out there, there just isn’t a lot of labor.”
Companies are ringing alarm bells because of a shortage of chips
When the Covid-19 pandemic hit an already fiery semiconductor industry saw a surge in demand for products like smartphones and computers, causing an unprecedented supply shock that drove companies across the board to fill orders.
The semiconductor shortage has been well documented by executives on earnings views this quarterly reporting season. According to a CNBC analysis of FactSet data, at least 70 S&P 500 companies have pointed to chip shortages in their earnings views over the past three months.
Ford Motor said the chip crisis cut vehicle volume by 17% in the first quarter and hit free cash flow by $ 3 billion by 2021. CEO Jim Farley warned that the manufacturing impact will get worse before it gets better.
Elon Musk, CEO of Tesla, said the electric car maker experienced “some of the toughest supply chain challenges” in the company’s history in the first quarter.
“Insane trouble with the parts supply chain – across the range of parts. Obviously we’ve heard of the chip shortage. This is a big problem,” Musk said on an April 26 earnings call.
It’s not just about electronics and automobiles – companies of all kinds are updating investors on the aftermath of the semi-crisis. Chips have become such a ubiquitous part of so many products that companies selling medical devices, chemicals, clothing, and even tobacco are sounding the alarm, according to the analysis.
Lumber prices drive house costs up
For wood – the wood used to frame a house, cabinets, doors and floors – prices rose more than 80% this year and 340% year over year. The rising prices were triggered by a combination of reduced supply during pandemic standstills and increasing demand for new homes.
Brooks Mendell, president and CEO of forest company Forisk, said Monday on CNBC’s Worldwide Exchange that consumer demand for lumber has not slowed, even after many manufacturers have been forced to shut down.
“From last year when Covid and the recession hit, sawmills slowed down and projects that added mill capacity slowed down,” he said. “But in the meantime, everyone at home was getting on with their projects, the demand for home ownership continued, and repairs and remodeling just kept cooking.”
The shortage caused the average price of a new single-family home to increase by nearly $ 36,000, according to an analysis by the National Association of Home Builders.
“This unprecedented price hike is hurting American home buyers and builders and hampering housing and economic growth,” said Chuck Fowke, chairman of the NAHB, in a statement.
The cost of packaging materials increases by 50%
There is also a major shortage of packaging materials such as plastics, paper and metals, according to Mintec Global, which has increased packaging costs by more than 50% since the pandemic began.
According to analysts at Mintec, a rapid increase in e-commerce during the lockdown led to an increase in demand for paper packaging materials, which further tightened supply in light of the reduced waste paper from retailers.
The supply is also expected to be limited for longer, as many paper mills stop in the spring for scheduled maintenance, according to the analysts.
The prices for most plastics are at a multi-year high. According to Mintec, US polypropylene prices have more than doubled year over year. In addition to lockdown restrictions at the height of the pandemic, plastics markets were hit by significant plant failures in the third quarter caused by hurricanes followed by severe winter storms in February.
Mintec also said logistical issues like container shortages and a shortage of shipping containers have led to an exponential increase in freight costs.
It is widely expected that some of the supply chain bottlenecks and increasing price pressures will be passed on to consumers.
“Throughout 2021, goods price inflation will be above its longer-term trend,” said Gapen.
Economists expect the consumer price index to rise 0.2% in April versus March, after rising 0.6% the previous month. According to the Dow Jones, however, the index is likely to sizzle with a jump of 3.6% year-on-year.
Chemical fire reduces the supply of chlorine
Demand for chlorine was higher than usual last year due to home improvement projects and stays caused by pandemics. Then a chemical fire broke out at one of the largest manufacturers of chlorine products in the country in Louisiana, cutting off an important source of supply.
Chlorine prices started rising after the fire in August, data from IHS Markit shows, and are up 72% from January 2019. The facility is not expected to reopen until 2022.
Americans may be forced to look for alternatives this summer, such as switching from pools to saltwater systems. But these are also in short supply.
– CNBC’s Tom Franck contributed to the coverage.
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