The economy grew at more than a 6% rate in the first quarter (annual rate), stunning! Yet, growth was held back by shortages of microchips, houses, and labor just to name a few items. One market not troubled by shortages is finance. Thanks to the Federal Reserve, credit is widely available and at historically low interest rates. However, with inflation, it takes more of those cheap dollars to buy the labor and materials firms need. In construction, lumber costs have doubled in recent months, automobile production has been slowed due to a shortage of microchips (appliances as well). As a result, prices for houses and cars have been on the rise.
Economic performance varies substantially by industry. While many businesses kept operating during the pandemic (such as construction, some retail, outdoor recreation) others (restaurants, gyms, etc.) were basically shut down or significantly restricted. States responded to the pandemic with very different types of regulations and where industries had different concentrations across states (tourism, agriculture, etc.), the impact on small firms varied as well.
Inventory shortages of materials or final goods were most frequently reported by small firms in the wholesale (26%) and retail (21%) trades. The labor shortage is a major headwind for construction, agricultural firms and firms in the service sector. Restaurants are having major difficulties finding staff. They are included in the “retail” category which masks their problems by averaging them in with all other retailers.
Serious supply chain problems were reported most frequently by firms in the transportation sector (36%) and firms providing non-professional services (31%). Manufacturing (29%) and construction (27%) also frequently reported supply chain problems. Hopefully most of these will be resolved quickly as the economy gets back to “normal” and everyone opens up for business.
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The magnitude of the effect of these “barriers” is demonstrated by the significant uptick in economic growth that accompanied the re-opening of the economy. Growth rates in states that have re-opened more quickly are substantially better than in states that have re-opened less, and unemployment rates are lower as well. Of course, not all problems can be quickly dealt with by turning entrepreneurs loose to get business started. Having needed supplies stuck on a container ship in the Suez Canal is beyond their reach. Owners have strong incentives to solve problems and do so more efficiently than “public sector” workers and regulators who often fail to even see if their regulations are achieving a hoped-for goal that might justify the costs their regulations impose. Re-opening the private sector is probably the best recovery policy that government can undertake.