Key reason for supply shortages: Americans keep spending

DETROIT , - Take a look at the abandoned store shelves, the stalled containers ships, and empty showrooms and you will see the root cause of the lack of nearly everything.

Key reason for supply shortages: Americans keep spending

DETROIT , - Take a look at the abandoned store shelves, the stalled containers ships, and empty showrooms and you will see the root cause of the lack of nearly everything.

Despite the ongoing pandemic, U.S. households are still flooded with cash thanks to stimulus checks, booming stock market and increased home equity. They feel like they can spend again freely, even though it has been slowing down. High consumer demand is a driving force in many of the U.S.'s and global economies. This has led to a shortage of goods for the U.S. as well as much of the rest of the world.

You can also add the fact that companies order and keep more parts and goods than they actually need to ensure they don't run short. This creates an almost insatiable demand which is increasing supply shortages.

This is where the problem lies: Suppliers were so caught up in how quickly pent-up spending surged after the recession that they won’t likely be able catching up so long as demand continues to be strong. This is because Americans are still spending more on goods (electronics, furniture, appliances and sporting goods) than on services such as hotels, meals out, and tickets to movies. This is causing the U.S. to inflate faster because of all that goods demand.

If spending does not snap back to services, or if something else causes people to stop buying as much, it could be deep into 2022 and even 2023 before global supply chain normalcy returns to some degree.

Bindiya Vakil (CEO of Resilinc), a consultancy firm that assists companies in managing supply chains, stated, "Demand has completely skewed." "This is becoming more and more painful every day."

People may stop spending as everything is more expensive now. Inflation in the United States has risen 6.2% to its highest level since 1990. This was due to rising prices for food, fuel, and housing. According to the laws of gravity, inflation will eventually have a negative effect on spending.

Manufacturers foresee heavy demand continuing, but also a deteriorating supply chain and rising inflation. Ford Motor Co. has had to overhaul its ordering system for parts that take long to arrive in order to remedy shortages due to a chronic shortage of computer chips.

Analysts were told by Hau Thai-Tang (Ford's chief operations officer and product officer), that "it's highlighted that [the] just-in-time operating model that's been prevalent within autos may not have been the right operating model."

Even smaller companies have felt the need to stockpile as much as possible in order to continue making products. Moriarty's Gem Art, a Chicago family business, has been stocking up in gold, silver, and platinum to make rings and necklaces.

Jeff Moriarty (the marketing manager) stated that "We are ordering a lot more than we actually have orders for -- just to be safe"

Even a normal post holiday shopping slump, while it may help, isn’t expected to be sufficient to clear ports, speed up shipping traffic, or allow factories replenish their inventories.

Oren Klachkin (lead U.S. economist at Oxford Economics) stated that the baseline expectation for improvement was around the middle 2022. "But I believe the chances of that happening later in life are quite high," he said.

Although Americans are more adventurous in recent months than ever before, there is still a significant imbalance between their spending on goods or services. The pent-up demand from the economic recovery remains skewed towards furniture and cars, and less towards haircuts and concerts. Although services spending has increased in recent months it is not enough to close this gap.

Consumer spending on goods has increased 32% since April 2020. It is now 15% higher than it was in February 2020 when the pandemic paralyzed economies. About 40% of consumer spending is now in goods, up from 36% prior to the pandemic.

U.S. factories tried hard to keep up with the demand. According to the Federal Reserve production rose by nearly 5% in the past year despite occasional ups and downs. This was despite disruptions caused by chip shortages.

The gap between the American consumer's needs and what factories can produce has been narrowed by imports. The U.S. imported 23% less in January-September this year than it did in the same time period in 2020. Due to record imports, the U.S. suffered a record-breaking deficit in goods trade in September. Imports outnumbered exports by $98.2 million.

As more people are vaccinated in wealthy countries, the demand for goods has increased. However, in poorer countries, particularly in Southeast Asia and the United States, the spread of the Delta variant has forced factory closures and impeded supply chains. It only recently started to recover.

Many Americans have also decided to leave jobs that required frequent contact with the public. This has led to a shortage of workers who can unload ships, transport goods, or staff retail shops.

Ports are clogged. Last month, 65 ships waited off California's coast to be unloaded at Los Angeles and Long Beach. This took two weeks of work. The average wait time was 12 days. This has now increased to 78 ships with an average wait time of almost 17 days despite the fact that port operations are open 24/7 starting in October.

Gene Seroka, L.A. port executive director, stated that ships used to have set arrival times before the pandemic and would go straight to a dock for unloading. With record-breaking Asian factory output, the port now moves record amounts of goods. But it is not enough to satisfy the demand.

Seroka doesn’t see shipments slowing down even next year. According to Seroka, retailers have indicated that they will use January and February to replenish stock, if necessary.

Rail lines, like ports, are moving more goods. The freight that America's railroads shipped was up 7.5% compared to a year ago. In September, truck shipments increased by 1.7%. However, there aren’t enough trucks or drivers to transport all of the freight.

China's manufacturers are also struggling with shipping delays and container shortages, as well as rising costs. Shantou Limei International Ltd. makes toys for children in Shantou and expects to see sales drop by 30% due to shipping delays and more expensive shipping.

Frank Xie is the general manager of the company. He stated that the biggest problem was being unable deliver goods on schedule due to difficulties in securing freight containers. "Many things have happened beyond our control and expectations."

American Philip Richardson, who makes loudspeakers near Hong Kong in Panyu, stated that orders have increased by 400%. The reason for the increased demand is due to increased home electronics purchasing by Europeans and Americans. In July, the cost to ship goods to U.S. customers in a 40-foot container was more than tripled.

Richardson stated, "The customer must bear it or cut back orders."

Song Wenjie, the owner of Hand-in-Hand Electric Appliance Technology Co. in Jiaxing south of Shanghai, stated that it is not profitable to ship certain goods due to rising cargo prices.

Song stated that a combination of shipping delays and power outages could lead to a 20% drop in production this year.

Shoe Zone is a British retailer who sources its majority of its footwear from China, and is one of the European companies struggling with tight supply lines. Anthony Smith, chief executive, stated that shipping container prices have increased at least fivefold in the past 12 months.

He stated that "this will continue to affect us for at most six more months until the problems being experienced in the entire supply chain return to more reasonable levels."

You need to login to comment.

Please register or login.

RELATED NEWS