Wells Fargo and Rabobank Economists Forecast Continuing Supply Chain Problems
According to economists at Wells Fargo and Rabobank, strong US demand for goods and continued transportation and logistics challenges will lead to persistent supply chain challenges throughout the year.
Speaking at the National Fisheries Institute’s 2022 Global Seafood Market Conference, Wells Fargo Chief Economist Tim Quinlan said strong U.S. retail sales, driven by rising wages and government stimulus measures, have kept demand for goods high through 2021, putting pressure on the import market to keep pace. But delays due to COVID-19-related transportation slowdowns, labor shortages and lack of competition in the shipping industry have prevented supply chains from catching up with demand, and the delays are mounting. will continue for the foreseeable future, Quinlan said.
“The number one question I hear from people is when will this be fixed. If you listen to a lot of earnings calls…you hear CEOs talking about what they are doing to better procure what is needed along their supply chains, and the conventional wisdom is six to 12 months, by the end of this year things get better,” Quinlan said. “Don’t shoot the messenger on that, but I’m not buying it. I think we’re actually continuing to deteriorate here in a number of key metrics…I don’t see any immediate relief with these pressures on [the] Supply Chain.”
Retail sales rose 21.5% from pre-pandemic levels, which Quinlan attributed to US government stimulus checks, generous unemployment benefits and the child tax credit. Even if the three programs are no longer funded, a carryover effect will continue to fuel the US economy. Quinlan predicted continued U.S. GDP growth over the next few years, but dropping from an estimated 5.5-6% for 2021 to around 2.5-3% through 2024, according to Quinlan.
There has been a slowdown in US economic growth since early January due to the omicron variant of COVID-19, but the downturn has been less severe than those caused by the arrival of previous variants of the coronavirus.
According to Quinlan, consumer demand in the United States has been accompanied by a massive demand for capital goods and capital expenditures by the American economy.
“That’s actually, I think, one of the most encouraging long-term drivers for potential growth,” he said. “If we do have a high rate of capital spending in this cycle, that could lead to a productivity boom. And those two factors could actually increase our growth potential. rate.”
Quinlan noted that the U.S. economy still lacked 3.5 million jobs from pre-pandemic levels. Nevertheless, he advised against government intervention.
“The labor market absolutely doesn’t need help from Congress, the Federal Reserve or anyone else. It’s white hot right now,” he said.
A labor shortage, however, could lead to worsening inflation, which Quinlan has identified as one of the main problems facing the US economy.
“I think the issue of shrinking labor will continue to be long-lasting, and that will eventually create a bidding war and contribute to service price inflation, which we don’t haven’t really seen anything meaningful in this cycle yet,” he said.
The US Federal Reserve was slow to recognize inflation as a problem it needed to address, but now plans to act, Quinlan said. It will likely raise rates four times in 2022 — to a level of 25 basis points every two meetings, plus three more rate hikes in 2023, according to Wells Fargo forecasts. But Quinlan said there is cause for concern that most American executives have never experienced this level of inflation in their working lives.
“We haven’t had inflation this high since before the Cosby Show was on TV,” he said. “It’s something most people in their working years have never experienced in a setting like this and it’s hard to guess how we react to it.”
Christian Lawrence, senior multi-asset strategist and managing director of Rabobank, speaking after Quinlan at GSMC, said the enduring strength of the U.S. market surprised most economists.
“WWe continue to see stock prices perform incredibly well. I don’t think anyone would have guessed at the start of 2020 that two years from now we would still have the coronavirus and yet we would see record highs. And it’s not just in one category. We have now seen all equity classes – whether small cap, large cap, value, growth – all reach near record highs during 2021, the third year we recorded gains of more than 15%.
Lawrence said part of the unpredictability in the market is due to a flood of new funds entering the market, with 25 million new retail trading accounts having been opened in the United States since the start of the crisis. coronavirus. This has been a major driver of inflationary pressure, crushing several deflationary factors that previously controlled the market, he said.
“Now, it’s fair to say that the stock market looks overvalued on just about every fundamental metric you can look at. Corn what we’re seeing right now now, over the last few weeks, is a real breakdown in terms of the performance of the different stocks below the surface of the S&P 500,’ he said, with investors shifting from growth stocks to stocks valuable.
While inflation is most notable in the United States, it’s actually a global phenomenon, Lawrence said.
“Inflation is not an American story, it’s a global story. And in emerging markets, in general, demand hasn’t held up either and they’re facing a situation of stagflation, which is what Mexico is particularly facing right now,” he said. .
Globally, governments are taking very different action plans to respond to COVID-19, creating a complex scenario that makes predictions difficult, Lawrence said.
“There’s going to be a lot more differentiation, especially in emerging markets. We see a wide range of interest rate trajectories, a wide range of growth trajectories. We’ll probably see a lot more volatility and a lot more divergence,” he said.
In the United States, Rabobank expects 10-year interest rates to remain in the 1.5-2.5% range. But as the direction of the US government in its economic response becomes clearer in the coming months, that prediction could change, Lawrence said.
Continued supply chain disruptions and labor shortages caused by young workers not re-entering the market due to a variety of factors – Lawrence said these included fear of contracting COVID- 19, the lack of childcare and schools not fully reopening, and a general shift away from service jobs — will result in continued wage growth and high prices, he said.
“We could well see prices continue to rise,” he said.
For any other country, the level of debt the United States currently carries would be a concern, but since the United States has privileged status as the world’s reserve currency, that’s less of an issue, Lawrence said.
“The dollar should remain well supported,” he said.
These competing forces make it difficult to predict whether the dollar will strengthen or weaken against other currencies, but it is higher in January 2022, he said.
“There is so much uncertainty right now, there is no clear consensus, and there is such a wide range of points of view,” he said. “Uncertainty reigns supreme.”
Photos courtesy of Christian Lawrence/Rabobank and Tim Quinlan/Wells Fargo