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It’s natural to blame panic-buying for the empty shelves you’ve seen at your local store during the past year of the pandemic. And while it’s true that panic-buying and hoarding is part of the problem, the reasons for such shortages are influenced by an economy that’s incredibly interconnected, says BYU economics professor Christian vom Lehn. Shifts in product consumption and how products are made and sourced have exposed weaknesses in the global supply chain.
Dr. vom Lehn’s research, recently accepted for publication in the Quarterly Journal of Economics, explores the common ups and downs of the U.S. economy and how these reflect an economy interconnected through a large network of supplier links. In this Q&A, Dr. vom Lehn addresses the state of the economy and what consumers can expect as they emerge from the pandemic recession.
Q: A recent report noted that the cost of just about everything is going up, and the percent change in the Consumer Price Index is at its highest level since 2008. We’re also seeing shortages of many goods as businesses struggle to keep up with demand. What’s causing this supply restraint?
A: A lot of this supply restraint is the natural fallout from the COVID-19 pandemic. The pandemic reduced production of many goods and services throughout the world as there were frequently fewer workers available, for a variety of reasons (illness, quarantine, family needs, local restrictions). Now, as life is starting to return to normal, we’re starting to feel the effects of those disruptions, as the usual supply of many products is below where it would be in a typical year, creating these shortages.
Q: Is there an end in sight to these shortages, or should I expect to change my buying habits?
A: For most shortages induced by the pandemic, these price surges are likely to be temporary, probably lasting less than a year. But the pandemic has certainly led many companies to reflect on the state of their supply chains, and there may be long-term changes to improve the resiliency of these networks. It’s possible this could impact prices and product availability in the future, but that’s still a ways out.
Q: We’ve seen shortages on everything from toilet paper to power tools. What other shortages can we anticipate or prepare for?
A: Anticipating the next shortage is always tricky. Prior to the pandemic, many businesses didn’t realize the full extent of how their direct and indirect supply chains connected them to the rest of the global economy and thus exposed them to certain vulnerabilities. So, some businesses were surprised by shortages themselves! But if we’re trying to guess where future shortages might occur, we might start by thinking about where consumption has fallen the most during the pandemic and thus where we might expect it to start rebounding rapidly. So, we might be on the lookout for shortages impacting hospitality, travel and dining industries as we see spending recover for these services. We can already see some of this happening with recently rising gas prices, as consumers are beginning to travel more.
Q: In Utah, we’re seeing shortages of lumber, concrete, steel and other home building materials. These shortages have resulted in exorbitant costs to build homes; some reports saying lumber scarcity results in an extra $25K per home in home-building costs. How are these shortages interrelated?
A: Workplace disruptions from the pandemic have certainly reduced supply in each of these industries. And the lumber industry was facing challenges prior to the pandemic for a variety of long run reasons — wildfires, climate changes, insect infestations, etc. But even if these industries hadn’t been running low due to the pandemic or other long-run factors, local supply would still have a hard time keeping pace with the surge in housing demand we’re seeing in Utah. Utah’s economy is doing very well and that attracts more residents, both by reducing the rate at which people move out and increasing the rate at which they move in. That increase in demand is pushing up housing prices rapidly. As a result, while housing price growth will surely slow down as part of post-pandemic adjustment (and housing prices will likely come down some from their current peak), higher average housing prices appear to be here to stay.
Q: Your research points out that fixing disruptions to businesses producing key inputs for making capital goods (like cars, houses or industrial machines) can have large impacts to bolster a recovering economy. How might we be seeing that now?
A: A core part of both long-run economic growth and short-run recovery from recessions is increasing investment in these capital goods. For example, in the typical recession, consumer spending drops by 1–2%, but business investment drops by 10–20%. The pandemic recession was a little different in that it hit consumer spending much harder than usual, but we still would expect resolving supply chain disruptions in industries that produce capital goods will be a big part of the ongoing recovery from the recession.
Q: What actions can governments take to ease the supply strain? What things can individual consumers do?
A: There are limits to what governments can do to ease the strain on supply. A lot of adjustment will just take time, both as production catches up and demand settles back into a more normal level. As consumers, the best we can do is be patient and acknowledge that we’ll see these disruptions continue over the next year as the world increasingly adjusts back to normal living and supply chains sort themselves out.