Supply chain disruptions, rising inflation and the middle market

After more than two years of dealing with convulsive change set off by the pandemic, American middle market businesses are girding for continued challenges, said Joe Brusuelas, chief economist for RSM US LLP, and John Drake, a vice president at the U.S. Chamber of Commerce.

At the top of the list are the supply chain disruptions set off by the pandemic and the surging inflation that has followed, they said during a wide-ranging discussion of today’s economic landscape in a recent quarterly webcast sponsored by RSM and the Chamber.

First, inflation must be brought under control if the gains of a growing economy are to be widely shared, Brusuelas and Drake said.

Much of the burden in meeting this challenge has been placed on the Federal Reserve, which has embarked on a campaign of interest rate increases to tame inflation—even at the cost of higher unemployment.

“Price stability is a precondition of maximum sustainable employment,” Brusuelas said.

Still, monetary policy can do only so much. When economic shutdowns in China disrupt the flow of goods around the globe, prices rise for everything from rain gutters to golf clubs. Add to that the commodities price shock from the war in Ukraine, along with an acute shortage of workers, and the result is a higher cost of doing business for the middle market.

The cost is particularly high for smaller businesses, which have little ability to absorb cost increases, Brusuelas said.

Problems at the ports

Drake, who handles transportation, infrastructure and supply chain policy at the Chamber, pointed to the Ports of Los Angeles and Long Beach as a ground zero of sorts for the supply chain disruptions.

For much of the pandemic, scores of ships loaded with goods from Asia were seen waiting for days off the coast of Los Angeles and Long Beach. Now, those ships are idling off the coast of China, waiting to be loaded once the recent wave of economic shutdowns ends.

It will take a long time for stability to return, Drake said, and even then things will be different.

“There is no return to normal,” he said.

The bottlenecks go far beyond shipping logistics. A severe shortage of truckers—estimated at 80,000 nationwide—has further delayed the delivery of goods, as have delays in the rail lines that serve the ports. If that weren’t enough, the ports of Los Angeles and Long Beach face a July 1 deadline in negotiating a new contract with the ports’ union.

Risk of a recession

Do supply chain delays and rising inflation suggest that a recession is looming?

The Fed, Drake said, faces a monumental challenge in trying to engineer a soft landing from surging inflation while not tipping the economy into recession.

“It’s like attempting to thread the needle while wearing boxing gloves and a mouthguard,” he said. Brusuelas sees a recession coming in the second half of next year, but that it will be shallow. He projects a 35% chance of a recession in the next 12 months.

Infrastructure spending

One factor that could blunt a downturn is the money from the recent infrastructure legislation. Unlike many spending plans approved by Congress and signed into law, the infrastructure act was designed with the medium to long term in mind. It calls for a relatively low level of spending this year—about $16 billion—and then ramps up.

“We’re slowly seeing it get out there,” Drake said, referring to the infrastructure money.

Eventually, the improvements to the nation’s essential systems like ports, bridges and broadband will help economic growth. There is little choice if America is to compete in the global economy, Drake said. “The transportation infrastructure must improve,” he said. “It lags other countries.”

Consider again the ports of Los Angeles and Long Beach. In the United States, they are the most important ocean entry point for goods. But a world ranking of port efficiency put the ports of Los Angeles and Long Beach at No. 328 and No. 333, respectively, partly because they do not operate 24 hours a day.

Looking ahead

If there is a bright spot in the economy, Brusuelas said, it’s the surge in small business formations that took place as the pandemic set in.

“That has continued,” he said. “It may not add much in the short term, but will in the medium to long term.”