Order your Christmas presents now — supply delays are here to stay

The COVID-19 pandemic isn’t like most market shocks. Typically, consumers spend less during periods of economic uncertainty. But the problem facing many businesses isn’t too little demand; it’s far too little supply.

Many industries rely heavily on complex networks of supply and distribution. Unfortunately, measures taken to control the pandemic, while necessary for public health, disrupted these networks. Factories were closed, border were tightened and millions of workers were furloughed or fired. Now, even as economies have largely reopened, the ramifications are still being felt.

The automotive industry provides a useful illustration. The epicenter of the COVID-19 outbreak, Wuhan, also happens to be one of the global capitals of automotive parts production. As a result, factory closures in China, followed quickly by shutdowns elsewhere, had significant downstream effects on carmakers. Major automotive companies saw profits decline by approximately $100 billion worldwide in 2020. Workers also felt the impact. Over 1.1 million automotive manufacturing jobs in Europe – plus another 300,000 in the United States – were negatively affected as assembly lines grounded to a halt.

These problems haven’t gone away in 2021. Vital parts and components remain in scarce supply. In response, Toyota recently announced that chip delays would force production down by 40 percent in September. Likewise, General Motors temporarily idled almost all of its North American operations.

All of this would sound normal given any other market shock. We typically think that uncertainty of the kind introduced by COVID-19 should undermine consumer confidence and encourage saving rather than spending. But this time it’s different. Car companies are cutting production despite soaring demand and prices, which are now at all-time highs. Dealers simply can’t keep enough cars on the lot.

Other industries are having similar trouble meeting demand. Rising transportation costs and overly crowded ports add to the headaches. In one telling scene, three dozen container ships idled off the California coast in August waiting for space to unload. Those ships carried a wide variety of consumer goods, such as appliances, which can now take three to six months to arrive for home installation.

Naturally, some firms are trying to adjust. Peloton, a manufacturer of home exercise bikes, responded to customer dissatisfaction (and a falling stock price) by spending an additional $100 million to help navigate shipping delays. But not every company can afford expedited shipping or shifting from sea to air freight. Nor can they afford to diversify their supply chain. Smaller, local businesses, such as microbreweries in Colorado, are left without enough aluminum cans to package their beer. 

Unfortunately, no immediate relief is in sight. Few predicted that incomes and spending would rebound so quickly from an unprecedented global pandemic. With demand so high, it will take time before production catches up. Moreover, there’s a growing consensus that shipping prices will remain high and transportation networks will remain overcrowded. Taken together, it means that many businesses have to wait longer – and pay more – for their supplies.

These costs affect everyday consumers. Supply chain disruptions are fueling inflation, driving prices upward as the gap between supply and demand grows. So great are the inflationary pressure that recent wage gains, especially among lower-income workers, are erased entirely by soaring costs. 

Now, as the delta and mu variants add new uncertainty to markets, consumers should start planning for the future. Anyone hoping for a new car, refrigerator or exercise bike for the holidays might want to buy now. Waiting until Christmas Eve won’t work out this year.

Jeffrey Kucik is an associate professor in the School of Public Policy and the James E. Rogers College of Law (by courtesy) at the University of Arizona.