When the economy was in lockdown there was a strenuous debate on what would happen when the lockdown ended. One argument was the economy would stay in recession for months before gradually recovering. This view supported the case of preserving the lockdown since there was little benefit to opening back up. “You can’t just turn the economy back on like a light switch”, they claimed. The opposite view claimed that when the economy reopened, there would be a “V” shaped rebound, with the economy taking off like a rocket. This argument supported opening the economy up fully and immediately, despite the health risks.
As it turned out both sides were wrong, or at least only partially correct. After the fifty governors started reopening their state’s economies to one degree or another, economic activity jumped, but it wasn’t a capital “V” recovery. It was more like a lower case “v” recovery. This is because manufacturing has been lagging compared to the robust comeback in the consumer goods sector. When that proverbial light switch was turned on, the demand side of the consumer economy snapped right back, except for those contact-service industries. Demand also jumped on the industrial side but it is hard to gauge due to the supply factors discussed later.
Consumers who were able to maintain their income, spent heavily on goods and non-contact services. In many cases, they had even more disposable income due to government stimulus checks. It was relatively easy to restart the export goods pipeline, so easy the ports have been backed up for weeks as containers arrived.
It is much more difficult to jump start the industrial side of the economy. Factories were shut down for weeks. Some of these factories had never been idled except for a few days at the end of the year for holidays. There are startup and maintenance issues with some types of equipment. Workers need to be recalled, and material and parts inventories need to be replenished.
In addition, there were significant health factors involved in restarting the factories. Social distancing, disinfecting, contact tracing and quarantines all impacted productivity. Some workers declined returning to factory jobs due to personal or family health concerns. While many employees switched to working at home, this is not an option for production workers. There is also a major issue with government stimulus and extended state unemployment benefits providing a disincentive for reentering the workforce. In some states, the hourly unemployment benefit is close to or greater than the average factory wage. This is causing a severe worker shortage in certain industries.
There are also problems acquiring imported parts. Mexico remained on lockdown weeks after the U.S. restarted. Overseas producers rebooted more quickly, however; the U.S. ports were flooded with containers of restocking consumer goods. This is causing gridlock and delaying the delivery of key industrial components to manufactures for weeks.
All these problems resulted in a dysfunctional supply chain. There are steel, aluminum and wood shortages, among others. Even computer chips for autos and trucks are scarce. There are component shortages in many industries which are slowing production and raising prices. My sources tell me that the problems are intensifying in February, with no relief in sight. One manufacturing expert says “So the supply chain has basically dissolved.” It’s difficult to determine what the true demand is coming out of the lockdowns, but it is readily apparent that we have a supply chain quagmire, the likes of which this country has not experienced since WWII.
A Wide Gap Between Consumer Demand and Industrial Supply
The great disparity between the rebound in consumer market versus industrial is illustrated by comparing orders for van trailers, those hauling consumer goods, and those for flatbed trailers, used for transporting industrial goods. For the 2020 September-December time period, van orders were up an astounding 160% over the same period last year. Flatbed trailers were up only 31% (still respectable).
The good news is that flatbed orders have shown a noticeable improvement starting in November and are accelerating in 2021. The ISM PMI for manufacturing remains at high levels indicating that demand is strong for manufactured goods and is growing. Now supply just needs to catch up.
The Future for The Industrial Sector Looks Bright
The supply chain clog will be cleared at some point due to the laws of economics and the profit incentives of free markets. It could take an extended time since conditions are still worsening. The vaccine should lower infection rates and allow many people to return to the workforce, including factory jobs. Also, as state unemployment benefits run out, the job numbers could spike. This should drive down unemployment, and with the reopening of the travel and hospitality sectors, give a welcome boost to GDP.