“Rush hour,” proclaimed the town crier in that inimitable Monty Python movie and presto: The streets were jam-packed! Through the depths of our COVID-19 gloom, it seemed that as long as we still had vibrant demand, we’d easily be able to ramp up production to meet it. Surely the greater worry was whether the town crier would actually ever ring the bell again. Well, it seems that has happened—and we’re having a hard time getting busy again. Demand is vibrant, but there seem to be shortages everywhere, and for what’s available, prices are zooming up. Is it all temporary, or is it going to take time to work out?
Central banks the world over are trying to figure this out. If it isn’t temporary, then prices are likely to increase above target ranges for some time. Monetary authorities have tried to manage expectations, allowing that a little inflation isn’t a bad thing. Indeed, if slightly higher inflation is well-contained, then it’s likely the strongest signal that the world really is rebounding.
To that end, recent price data have been somewhat alarming. After decades of calm, producer prices in the United States are showing persistently strong monthly increases, and, sad to say, those increases are accelerating every month. And it isn’t just the more volatile price elements; so-called “core” prices are also up, and the monthlies for core are currently outpacing the broader index. If anything, the increases in producer prices are even greater in Canada.
Producers don’t seem to be eating those input price hikes on their bottom lines. Stateside, consumer prices are also on the up-and-up. We’re tamer here in Canada, but we’re also contending with lockdowns, which may well be suppressing things. Time will tell whether sellers will be able to hold off on passing general price increases on to consumers.
That much we all know, as it’s being reported in the news and on social media everywhere. But where’s it all going? One of the key arguments economists use is capacity. If there’s enough of it, and it can be brought back into play, then it should calm things down—we just need a little time. Lots of spare capacity opened up when the economy flopped in March and April 2020. Is there still lots to play with?
Sadly, there isn’t, at least in the manufacturing sector. Surging sales saw average capacity utilization for all manufacturers zoom up from 94% of pre-COVID-19 levels to slightly more than 100% between February and March. That’s a first since the pandemic hit. It’s great news, but the downside is that there’s not a lot of wiggle room in production at a moment when demand is surging.
Obviously, it’s not the same for every sub-sector. Microchip shortages have slowed things for the auto and auto parts sector, which is holding capacity utilization down in the beleaguered transportation industry. Printing, clothing and petroleum and coal products all have varied amounts of spare capacity, but they are exceptions. Certain services, mostly related to tourism, have massive idled capacity, but few in these industries have what the others need to ease constraints. All other sectors are at or above pre-COVID-19 capacity levels, topped by electrical equipment, wood products, machinery, and chemicals, where conditions are generally red-lining.
Remarkably, the U.S. seems to have a bit more room to manoeuvre. Like Canada, machinery, food, and wood products are pushing the limits, but by our current measure, there does seem to be room to move in a lot of other industries. Upstream capacity generally seems less affected; it’s the pressure on the finished goods that seems to be exerting itself on selling prices. If that’s the case, then restarting more of the upstream businesses could help production to ramp up, easing supply-chain logjams and matching production more closely with demand.
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This phenomenon is perhaps most obvious in supplies of semiconductors. This is where capacity becomes more global in its reach. Shipments of Asian semiconductors haven’t kept pace with North American auto sales and production. Therefore, in spite of searing demand, lot inventories are perilously low because production simply can’t keep up. As such, U.S. auto producers have seen their capacity utilization swoon from close to 100% of pre-COVID-19 levels in January to just 88.6% in April.
Clearly, current constraints go well beyond geographic boundaries. Solving current supply shortages will require a well-orchestrated global ramp-up in production. It does actually seem that although painful, it’s easier to stop an economy than to restart it.
The bottom line?
The crier has rung the rush-hour bell, and the stalls in the market are only half full. Buyers are rushing in and bidding the prices up. The remedy? A supply-chain reboot that’s global in its reach. Hopefully it’ll be in time to stave off persistence in those price increases. There seems to be enough capacity in the system to get things going again in short order.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.