Based on media reports and poll analyses, in mid-November, it’s hard to believe, there is anything noteworthy in the US economy other than inflation. But there is and it’s mostly good news. Let’s deal first with the causes of the sharp price hikes, especially gas at the pumps.
Why are Consumer Prices Rising?
The explanations are basic economics about the relationship between supply, demand, and inventories. During the first months of the pandemic American buyers stayed home, demand sunk and inventories built up, but over time were slowly depleted. Meanwhile, imports had been ordered against anticipated future demand which was not realized. But, about 4-5 months ago, millions of Americans got vaccinated, felt protected and had money to spend, thanks to the Trump and Biden Administration’s’ decision to protect people’s incomes and support hard hit retailers. These appropriations also kept state and local government tax revenues stable. Trillions of dollars were appropriated and distributed.. Suddenly demand surged.
The manufacturers and retailers were not prepared. In the face of the earlier steep decline in demand, they had cut production, laid off workers and slowly depleted their inventories. The orders they had placed to resupply inventories were, at best, only being delivered very slowly or not at all. Many were unable to satisfy the surge in demand and did what sellers caught in this situation, usually do; they raised prices and then did so again.
The goods ordered were either not being produced by foreign factories facing similar workforce and supply challenges or were dribbling out in smaller quantities. The orders that were filled, had been shipped tto the US. However, when the goods arrived at US ports, they weren’t offloaded because port container storage was full. Complicating a bad situation, Covid related shortages of stevedores, truck drivers and trucks, meant storage space couldn’t be cleared fast enough or containers shipped onward to the markets. .By 11/09/21, some sixty ships lay offshore of two of America’s largest ports, Los Angeles and Long Beach.
And now about the sharply rising prices at the pumps. The United States and other Western countries do not control gas prices. They are based on decisions by something-like a cartel, called the Organization of Petroleum Exporting Countries (OPEC). The Pandemic also seriously impacted its oil production, reducing that available to consumers. When their production declines, supply to consumers is reduced and prices go up. When it increases, prices go down. Sometimes there’s a market glut and we experience $2.40/gallon gas.
OK, but How is the US Economy Doing?
Basically, it’s recovering well from the Pandemic imposed crisis, thanks to the very substantial monetary and fiscal responses by the Federal Reserve, the White House and the US Congress, aimed largely at protecting the demand side of the economy..
The Bureau of Labor Statistics reported it had underestimated job growth from June to September by 626,000. Goldman Sachs projects that by the end of 2022 the unemployment rate will be at a 50-year low, i.e. it is 4.6% now and is expected to decline to 3.5%. Retail sales are 16% higher than they were in November 2020 . JP Morgan upgraded its expectations for GDP growth from 4% to 5%. .
Interestingly, the strength of the economy is reflected in a recent poll that found only 5% of Americans believe inflation is the most important economic issue facing the country. Maybe less media and political commentary about inflation and more on the basic good stats would help. Or maybe not.
And the Backlog at US Ports?
California Governor Gavin Newsom visited the ports of Los Angeles and Long Beach on 11/17/21 and was pleased to learn that the container backlog had been reduced by 36%. He was told that the Administration’s recommendation the ports operate 24/7 and the port authority’s own initiative allowing one additional level of container storage (from 3 to 4) had helped. Additional hiring by the ports had also eased the situation.
Tom Timberman is an Army vet, lawyer, former senior Foreign Service officer, adjunct professor at GWU, and economic development team leader or foreign government advisor in war zones. He is the author of four books, lectures locally and at US and European universities. He and his wife are 24 year residents of Kent County.