The pain has become too much to bear.
Yes, the Fed is hiking rates, but I’m talking about the lack of supply. The broken supply chains, the shipping delays, the worker shortages, the rising grocery bills, the lack of ketchup packets. Altogether, a series of unfortunate events turned a plentiful economy into a scarce economy in a matter of months.
Now, even though we’ve seen some progress with supply chains and breakneck demand, we may be reaching a breaking point. The government — which hasn’t done much until recently — is finally pushing a few measures that could ease the pain.
And in the words of Lizzo, it’s about damn time.
The breaking point
You don’t need me to tell you how painful everyday life can be right now. Gas is still expensive, businesses are still dealing with quirky operating conditions, and car lots are still empty. But there’s been some relief: supplier delivery times are down, some store shelves are fuller, and you’re paying $4 instead of $5 for gas.
Less painful, but still lots of pain.
Just take a look at the New York Fed’s global supply chain pressure index.
And the “misery index,” which combines the unemployment and inflation rate, is near its highest point since the 1980s.Unfortunately, we’ve dealt with this pain for several months now, and people are getting restless. Plus, there’s evidence that lower- and middle-class families have felt this pain more than others, and they may be most affected by layoffs and culled hiring.
We may be in a recession, and the Fed has done a lot to fight inflation. But one thing Fed chair Jay Powell has made clear is that the Fed doesn’t have the tools to fight the low supply that’s bumped up prices for many products, most notably gas and food. He’s even low-key called out the government for not doing more.
Thus, the breaking point.
Policy responds
Last week, the Biden administration came out with a new plan to release oil out of the Strategic Petroleum Reserve (SRP) to oil producers, while giving producers the option to sell back reserves later on at a fixed price. A few days later, Senate leaders introduced a new version of the budget reconciliation bill, complete with measures to fund climate and health care provisions while changing the tax code.
I’m no public policy wonk or commodities expert, so I can’t dissect these initiatives too much. However, it seems like policymakers are finally willing to think out of the box to fix the economy’s woes, which could count for something in investors’ minds.
Employ America, a policy research organization that publicly suggested an oil options plan, wrote that granting the SPR the flexibility to engage in fixed-price contracts could provide stronger incentives for producers to expand investment. In the budget reconciliation bill, there are details that could limit prices on medical insurance and drugs, as well as introduce climate-friendly incentives that could help ease long-term reliance on fossil fuels. While Moody’s Analytics’ chief economist doesn’t expect the bill to dent inflation right off the bat, he said it could help lower-income families through tempered medical costs and eventually “nudge the economy and inflation in the right direction.”
There are reasons to be skeptical of any new policies. We haven’t seen these plans play out in the real world, and there can be unintended consequences. Plus, in a period of high inflation, it may be a bad look to ratchet up government spending — even if there are measures in place to pay it back later. And don’t forget about Congress’ gridlock — current and future policy efforts are rarely a sure thing.
But when markets are on edge about inflation, supply, and the future, policymakers may just get an A for effort. At the very least, we may have more tools at our disposal to fight the supply crunch and aid those hurting the most.
Policy and productivity
Any effort policymakers, businesses, and consumers can make to fight inflation right now is important. But in a painful time, it could be encouraging to talk about how our response to the supply crisis could be productive for the future of the economy.
While external shocks like COVID and the Ukraine invasion are horrible events — and they’ve caused much of this economic pain — they’ve also forced the world to rethink how we work, shop, move, and live.
This is an important point. Yes, these policy actions could help the current crisis, but down the road it could make society more resilient against these unpredictable shocks. A new approach to insurance and drug costs could help keep a subset of Americans afloat in a recession, and funding it through fiscal restraint could keep future inflation contained. And as the carbon transition progresses and commodity markets adjust, we could insulate the globe from another energy crisis down the road. Policy can get us closer to these goals over time, but only if it’s implemented.
This is also why it’s so important for multiple parties to take action in this crisis. The Fed can’t enact spending measures to address the structural problems that got us here in the first place: shoddy supply chains, lean businesses, and an over-reliance on fossil fuels. The government can’t influence demand and rate-sensitive sectors like the Fed can. Business owners play a part, too. They’re on the front lines, implementing processes and operations that keep the economy running.
Luckily, the Fed has been doing its thing, and some businesses are pouring money into improving their supply chains and staff. Supply chain disruption has been the most-mentioned topic on S&P 500 earnings calls this season, according to Bloomberg. Business investment through June was the strongest it’s been in the first half of a year since 2012, and companies poised to have even more cash on hand after a surprisingly good earnings season. Hiring has even been unusually strong after the COVID recession, in part due to how understaffed American companies were after the Global Financial Crisis. Together, these efforts can lead to higher productivity, which can be a powerful driving force for economic growth.
A note about policy and pressure
Much of this post has been a rant about the economy’s painful situation. But the government’s action could signal a way out, plus a more resilient future ahead. Policy action and corporate investment could open up new opportunities for your portfolio, too. Clean technology and healthcare have been popular themes among individual investors, and they may be the center of attention as the budget reconciliation bill progresses.
Yes, there’s a lot of pressure on this economy.
But remember: pressure makes diamonds.
*Data sourced through Bloomberg. Can be made available upon request.