The COVID-19 pandemic is not like most market shocks. In general, consumers spend less during times of economic uncertainty. But the problem many businesses face is not too little demand; it is far too little supply.
Many industries rely heavily on complex supply and distribution networks. Unfortunately, the measures taken to control the pandemic, while necessary for public health, have disrupted these networks. Factories have been closed, borders have been tightened, and millions of workers have been laid off or made redundant. Now, even though the economies have largely reopened, the ramifications are still being felt.
The automotive industry provides a useful illustration of this. The epicenter of the COVID-19 outbreak, Wuhan, also happens to be one of the world’s auto parts production capitals. As a result, plant closures in China, followed quickly by closures elsewhere, had significant downstream effects on automakers. Large auto companies have seen their profits drop by about $ 100 billion worldwide in 2020. Workers have also felt the impact. More than 1.1 million auto manufacturing jobs in Europe – plus another 300,000 in the United States – have been negatively affected by the shutdown of assembly lines.
These problems have not gone away in 2021. Vital parts and components remain scarce. In response, Toyota recently announced that chip delays will cause production to drop 40% in September. Likewise, General Motors has temporarily idled almost all of its North American operations.
This would all seem normal given any other market shock. We generally believe that uncertainty of the type introduced by COVID-19 should undermine consumer confidence and encourage saving rather than spending. But this time it’s different. Automakers are cutting production despite surging demand and prices, which are now reaching record levels. Dealers just can’t keep enough cars on the lot.
Other industries have similar difficulties in meeting demand. Rising transportation costs and overcrowded ports add to the headaches. In a revealing scene, three dozen container ships idled off the coast of California in August while waiting for space to unload. These ships carried a wide variety of consumer goods, such as household appliances, which can now take three to six months to arrive at home.
Of course, some companies are trying to adapt. Peloton, a home exercise bike maker, responded to customer dissatisfaction (and the drop in the share price) by spending an additional $ 100 million to help overcome shipping delays. But not all businesses can afford expedited shipping or the switch from ocean freight to air freight. They also cannot afford to diversify their supply chain. Small local businesses, such as microbreweries in Colorado, find themselves without enough aluminum cans to package their beer.
Unfortunately, no immediate relief is in sight. Few had predicted that income and spending would rebound so quickly after an unprecedented global pandemic. With demand so high, it will take time for production to catch up. Additionally, there is a growing consensus that shipping prices will remain high and transportation networks will remain overcrowded. Overall, this means that many businesses have to wait longer – and pay more – for their supplies.
These costs affect everyday consumers. Supply chain disruptions fuel inflation, pushing up prices as the gap between supply and demand widens. Inflationary pressure is so great that recent wage gains, especially among low-income workers, are wiped out entirely by soaring costs.
Now, as the delta and mu variants add new uncertainty to the markets, consumers should start planning for the future. Anyone hoping to buy a new car, refrigerator, or exercise bike for the holidays may want to buy now. Waiting until Christmas Eve will not work this year.
Jeffrey Kucik is Associate Professor in the School of Public Policy and the James E. Rogers College of Law (courtesy) at the University of Arizona.