Robust U.S. demand for goods and ongoing transportation and logistical challenges will result in continued supply-chain challenges through the rest of the year, according to economists from Wells Fargo and Rabobank.
Speaking at the 2022 National Fisheries Institute Global Seafood Market Conference, Wells Fargo Senior Economist Tim Quinlan said strong retail sales in the United States, driven by rising wages and government stimulus, kept demand for goods high through 2021, putting pressure on the import market to keep pace. But delays due to COVID-19-related transportation slowdowns, workforce shortages, and lack of competition in the shipping industry prevented supply chains from catching up with demand, and delays will continue for the foreseeable future, Quinlan said.
“The number-one question I hear from people is, when does this stuff get resolved. If you listen to a lot of earnings calls … you hear CEOs talking about what they're doing to better procure what’s needed along their supply chains, and the conventional wisdom is six to 12 months, by the end of this year, things are getting better,” Quinlan said. “Don't shoot the messenger on this, but I don't buy it. I think that we are actually continuing to deteriorate here in a number of key metrics … I don't see immediate relief with these pressures on [the] supply chain.”
Retail sales have grown 21.5 percent over pre-pandemic levels, which Quinlan attributed to U.S. government stimulus checks, generous jobless benefits, and the child tax credit. Even though all three programs are no longer funded, a carryover effect will continue to fuel the U.S. economy. Quinlan predicted ongoing GDP growth for the United States through the next several years, but lowering from the 5.5 to 6 percent estimated for 2021 to around 2.5 to 3 percent through 2024, according to Quinlan.
There has been a retrenchment in U.S. economic growth since the start of January due to the omicron variant of COVID-19, but the downturn has been less severe than those caused by the arrival of previous variants of the coronavirus.
Consumer demand in the U.S. has been mirrored by massive demand on the capital equipment and capital expenditure side of the U.S. economy, according to Quinlan.
“This is actually, I think, one of the most encouraging long-term drivers for potential growth,” he said. “If we indeed have a big rate of capex spending in this cycle, that could engender a productivity boom. And both of those factors could actually lift our potential growth rate.”
Quinlan noted the U.S. economy is still short 3.5 million jobs compared to pre-pandemic levels. Nonetheless, he advised against government intervention.
“The labor market needs absolutely no help from Congress or the Federal Reserve or anyone else. It is white hot at the moment,” he said.
A shortage of labor, however, could result in a worsening of inflation, which Quinlan named as one of the foremost problems facing the U.S. economy.
“I think the decrease labor force problem will continue to be long-lasting, and that's going to eventually create a bidding war and contribute to services price inflation, which is something we've not really seen in a meaningful way yet in this cycle,” he said.
The U.S. Federal Reserve was late to acknowledge inflation as a problem it needed to address, but is now planning to act, Quinlan said. It will likely raise rates four times in 2022 –at a 25-basis-point level every other meeting, along with three more rate hikes in 2023, according to a Wells Fargo forecast. But Quinlan said there’s cause for concern in the fact that most U.S. executives have never in their professional lives experienced this level of inflation.
“We haven't had inflation this strong since before the Cosby Show was on TV,” he said. “It is something that most people in their working years have never experienced a backdrop like this and trying to anticipate how we respond to it is tough to guess.”
Rabobank Senior Cross-Asset Strategist and Managing Director Christian Lawrence, speaking after Quinlan at GSMC, said the enduring strength of the U.S. market has surprised most economists.
“We continue to see that equity prices have performed incredibly well. I don't think anyone would have guessed in early 2020 that in two years’ time, we'd still have the coronavirus and yet we will be seeing record highs in equities. And it's not just in one category. We have now seen every category of equities – whether it's small-cap, large-cap, value, growth – have all posted near-record highs over the course of 2021, the third year where we saw gains over 15 percent.”
Lawrence said some of the market’s unpredictability is due to a flood of new money entering the market, with 25 million new retail trading accounts having been opened in the U.S. since the beginning of the coronavirus crisis. That has been a major factor in inflationary pressure overwhelming several deflationary factors that had previously held control over the market, he said.
“Now it's fair to say the stock market looks overvalued on pretty much every fundamental measure that you can look at. But what we're seeing at the moment now, over the last few weeks, is a real breakdown in terms of how different equities are performing under the surface of the S&P 500,” he said, with investors rotating from growth stocks into value stocks.
While inflation is most notable in the U.S. it’s actually a global phenomenon, Lawrence said.
“Inflation is not a U.S. story, it’s a global story. And in emerging markets, generally speaking, demand has held up nowhere near as well and they are facing a situation of stagflation, which is particularly something that Mexico is facing at the moment,” he said.
Globally, governments are taking vastly different courses of action in responding to COVID-19, creating a complex scenario that is making forecasting difficult, Lawrence said.
“There’s going to be much greater differentiation, particularly in emerging markets. We’re seeing a wide range of interest rate paths, a wide range of growth paths. We’re likely to see a lot more volatility and a lot more divergence,” he said.
In the U.S., Rabobank is predicting 10-year interest rates remain in the 1.5 to 2.5 percent range. But as the U.S. government’s direction in its economic response becomes more clear in coming months, that prediction could change, Lawrence said.
Continuing supply-chain disruptions and a shortage of labor caused by younger workers not reentering the market due to a variety of factors – Lawrence posited those included a fear of contracting COVID-19, a lack of daycare and schools not fully reopening, and a general shift away from service jobs – will result in continued wage growth and high prices, he said.
“We could well see prices continue to move higher,” he said.
For any other country, the level of debt the U.S. is currently carrying would be a concern, but since the U.S. has the privileged status as the world’s reserve currency, it’s less of a problem, Lawrence said.
“The dollar is likely to remain well-supported,” he said.
Those competing forces make it difficult to predict whether the dollar will grow stronger or weaker compared to other currencies, but it’s higher in January 2022, he said.
“There is so much uncertainty out there at the moment, there is no clear consensus, and there is such a wide range of views,” he said. “Uncertainty reigns supreme.”
Photos courtesy of Christian Lawrence/Rabobank and Tim Quinlan/Wells Fargo
