The Global Supply Chain Chaos and its Impacts on Local and State Economies

Looking back at the beginning of 2020, the world acted relatively fast in halting their economies to prevent the spread and protect their citizens, significantly reducing economic activity, lowering consumer demand, and reducing industrial activity. However, with the option of continuing to work from home paired with the federal government’s fiscal stimulus that helped families to combat financial uncertainties, the national and global GDP suffered significantly. However, consumer health remained relatively strong.

Fast forward to the middle of 2021, the global vaccine rollout was rapid and effective in controlling the spread of the coronavirus and saving lives. We started seeing more and more industries opening up to pre-pandemic levels with more job openings and competitive pay to attract the workforce. However, with the recent data published by the Bureau of Labor Statistics, the labor force participation rate is below pre-pandemic levels, and it’s spread through various labor markets.

In addition, with the reopening of the economies, U.S. consumers remained healthy with a strong appetite for spending, which has been evident in the housing markets, auto sales, and other retail, paired with strong demand for the upcoming holiday season. However, global supply chains that were once suddenly disrupted are facing huge challenges to bounce back and meet exponential consumer demand.

In recently published data from Beacon Economics, it’s clear that the global supply chain problem will continue to get worse for the next few months before it gets better, as it is tied to global trade waking up to intense consumer demand. The report states, “Logistical problems, soaring transportation costs, and the pandemic are combining to make life difficult for California’s exporters. The coronavirus pandemic is not close to being finished with us. In recent weeks, global trade has been repeatedly disrupted by factory closures and port shutdowns, virtually all reportedly linked to outbreaks of COVID-19’s Delta variant. Exports to China and Southeast Asia have been especially affected. At home, hospitalizations and deaths from the virus have been rising at alarming levels, especially in areas with low vaccination rates.”

Check out our recent take on the health of U.S. consumers here.

Although the aforementioned issues have been a result of the pandemic and global supply chain disruptions, we are also seeing various sectors failing to procure goods and services paramount in the production of the final product, such as certain electronic chips used in a range of products from automobiles to household electronics. Furthermore, with increased demand, there are shortages of shipping containers in certain parts of the world, pushing global trade costs to new highs. With the shortage of truckers, ports are backed up with containers, large ships are stranded off the coasts, and it’s getting harder to get the finished product to their final destinations, increasing the cost.

The challenge for local and state economies in the U.S. is the potential impact on their revenues due to reduced economic activity and unmet consumer demand, as sales tax, driven by consumer demand—especially during the holiday months—plays an important part in overall local government revenues. Furthermore, the Beacon Economics also states that “Ports, particularly those along the U.S. West Coast, have been overwhelmed by an import surge that is now almost a year old and large numbers of ships are idling offshore awaiting a berth at ports throughout the country.” Ports that are funded through public debt, secured through revenues generated from trade activity, may see additional scrutiny by credit rating agencies and investors. The report also states, “Delays in unloading vessels necessarily affect the availability of containers for export merchandise as does the slowness with which importers are freeing up empty containers. In many instances, importers whose warehouses are over-stocked have been using containers (as well as the chassis on which they are transported) for temporary storage.”

Furthermore, to prepare for the holidays, some retailers are placing additional purchase orders as contingencies, which isn’t helping the situation.

The global supply chain problem will continue to persist for the foreseeable future before manufacturers, suppliers, and other parts of the supply chain catch up with the demand. With the holiday season upon us, the financial strain on the supply chain may add to the cost of goods for consumers. Credit rating agencies will continue to monitor public debt issuers, related to the supply chain, for their ability to meet the financial obligations.

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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.