ECONOMY

High demand is the oft-neglected aspect of supply-side shortages

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Hello from Frankfurt. While the city’s more of a financial than manufacturing hub, there’s still plenty of chatter here about how supply-chain bottlenecks are weighing on German manufacturing. Indeed, it’s hard to find anywhere in the world right now where supply shortages are not a topic of conversation.

That, of course, stands to reason. But if we’re going to truly understand what’s happening to global trade — and what is likely to lie ahead — more attention needs to be paid to the other side of the coin. That is, rampant demand for consumer durables.

To redress the balance somewhat, we’ve made the flipside the focus of today’s main piece.

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The stuffiness behind supply shortages

As financial journalists, we’ve grown used to people talking their own book. So we were somewhat surprised by the head of one of the world’s largest port and terminal operators last week doing the exact opposite.

Morten Engelstoft, chief executive of Maersk-owned APM Terminals, told the Financial Times that the only way to break the “vicious circle” of logistics logjam after logjam was to lower consumer demand, or spread out bursts of spending more evenly.

People buying less stuff is not exactly good for ports’ bottom lines, we’re sure you’ll agree. We do, however, think Engelstoft has a point.

Let’s back up a little. Remember life before the early spring of 2020? We do. Just about, anyway. It was a life that involved a lot more dining out, concerts and travelling. Stuck at home, we started buying sporting equipment and sprucing up our properties. We purchased goods that, unlike the services we consumed pre-pandemic, tended to be made abroad — often involved supply chains that over the past three decades have become more global and more complex.

Nor were we alone in turning to these coping mechanisms to get us through lockdowns. Here’s what’s happened to internet searches for weights, chairs and bikes.

Relying on Google Trends may seem somewhat flimsy (although, increasingly, policymakers and economists do). But there’s data out there to suggest internet searches and spending habits are correlated.

The chart below, based on the Bank of England’s CHAPS payment system, tracks transactions made using credit and debit card processors to about 100 UK retail corporates. It shows that, after an initial dip, spending on staples (such as food and drink, communications and utilities) and delayables — a category that includes clothing and footwear, vehicle purchases and household goods — rose sharply. Spending on social items (air travel, restaurants and hotels) collapsed and is only now just about back to where it was pre-pandemic.

Line chart of spending on credit and debit cards by category showing the pandemic vastly changed UK consumers' spending habits

In the US, the surge in spending on consumer durables may have been even more dramatic.

Line chart of Personal consumption expenditures: durable goods ($bn) showing US spending on consumer durables has soared during the pandemic

This spending surge is not just about businesses charging higher prices for consumer durables.

As Valentina Romei noted last week, manufacturers of some of the goods most in demand — from semiconductor chips to bicycles — have overcome all the obstacles the pandemic has thrown at them and raised output. Over the second half of 2020, the Port of Los Angeles, the US’s busiest, managed to process much higher volumes of cargo than it had a year earlier. For the year as a whole, volumes were only slightly down on 2019.

Of course, production and distribution would have been far better placed to handle rampant demand without Covid-related supply shocks. At one point, 10 per cent of the Port of LA’s 15,000-strong workforce either had the virus or were isolating. Those who were at work had to abide by distancing rules and other safety measures. But we still think the way in which the manufacturing and logistics industries have risen to the challenge has been both remarkable and seldom discussed.

We know that this dash for consumer durables is not news. Indeed, the reason why we’re writing about this now is that we’ve been revisiting the early days of the pandemic through reading Adam Tooze’s latest book, Shutdown, on how Covid shook the global economy. That’s reminded us of the scale of the response by the world’s monetary and fiscal authorities. By safeguarding people’s incomes and stopping many businesses from shuttering for good, governments and central banks boosted demand tremendously at a time when people have far fewer options than usual to purchase goods.

People will spend more of their disposable income on going out and less on goods as economies reopen. As Alan argued on Monday, there should be some temporary respite from the supply-chain crunch soon enough.

But the risks of consuming too much stuff for the world to handle will outlast Covid. As the planet warms, extreme weather events will probably lead to more supply shocks in the years to come. Indeed, the current shortage of chips is partly down to the Texas cold snap.

Like Engelstoft, we probably shouldn’t bite the hand that feeds us and talk down the longer-term prospects of global trade either. But some things are more important than talking your own book.

Trade links

Today’s round-up of scary supply chain news. UPS clearly doesn’t agree with today’s note and thinks the pandemic will leave permanent scars. Shipping container makers, meanwhile, can’t keep pace with demand. Soitec, which provides the silicon wafers used by chipmakers, says the EU needs to provide €20bn-worth of subsidies if it wants to “move the needle” on reshoring production.

Huawei CFO Ren Zhengfei has urged employees (Nikkei, $) to “seize the ground” on 6G technology patents, saying the company was in a “critical period of strategic survival.” A new joint venture between Taiwan’s Foxconn and state-owned oil and gas group PTT aims (Nikkei, $) to make Thailand the centre of electric vehicle production in south-east Asia. Claire Jones and Francesca Regalado

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