{"id":11666,"date":"2022-02-15T11:38:33","date_gmt":"2022-02-15T17:38:33","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=11666"},"modified":"2022-02-16T13:05:22","modified_gmt":"2022-02-16T19:05:22","slug":"long-term-inflation-globalization-and-supply-chains","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2022\/02\/15\/long-term-inflation-globalization-and-supply-chains\/","title":{"rendered":"Long-term Inflation, Globalization and Supply Chains"},"content":{"rendered":"\n
\"Long-term<\/figure>\n\n\n\n

Inflation has been a relatively hot topic of discussion with the annualized inflation rate hitting 7.5% in January, the highest rate since the early 1980s. Inflationary pressures resulted from a combination of increased demand as the economy rebounded from COVID, and<\/strong> reduced supply because of COVID related supply chain issues. This blog will look at inflation from a long-run perspective. How has globalization impacted U.S. inflation? Given COVID disrupted supply chains, what can we expect in the future? \u00a0<\/p>\n\n\n\n

Inflation and Globalization<\/h3>\n\n\n\n

There are two economic forces that affect prices \u2013 supply and demand. Generally, inflation is caused when there is a change to one<\/em> of these forces. If the supply of goods is reduced for a given demand, prices (inflation) will increase until a higher price level is reached that balances the demand to match the reduced supply. If the demand for goods is increased for a given supply, prices (inflation) will increase until a higher price level is reached that balances the supply of goods to match the increased demand. On the demand side, factors that affect inflation include changes in consumer demand (which is strongly tied to economic growth and the unemployment rate), business spending, and government spending. Interest rates can significantly affect consumer and business spending. On the supply side, factors that affect inflation include changes in the cost and availability of goods and services. One factor affecting the cost and availability of goods and services is globalization.<\/p>\n\n\n\n

The red line in Chart 1 below shows\nthe annual rate of U.S. inflation since 1970. The blue line shows the dollar\nvalue of U.S. imports of goods and services since 1970. <\/p>\n\n\n\n

Chart 1: U.S. Inflation Rate and Imports of Goods and Services 1970-2020<\/strong><\/p>\n\n\n\n

\"Chart
Source: Federal Reserve FRED Database; World Bank<\/em><\/figcaption><\/figure>\n\n\n\n

Globalization, as reflected by the\nvolume of U.S. imports and services, began ramping up in the 1980s. Imports\ndoubled in the 1980s, from $294 billion in 1980 to $591 billion in 1989.\nImports doubled again in the 1990s, from $630 billion in 1990 to $1.25 trillion\nin 1999. The trend continued after the turn of the century, with imports\nincreasing from $1.48 trillion in 2000 to $2.58 trillion in 2008, before the\nglobal economy collapsed due to the financial crisis. The last decade saw the\nlongest economic expansion in the history of the U.S. and included an increase\nof imports from a recession low of $2.0 trillion in 2009 to $3.12 trillion in\n2019 before the 2020 global economic contraction caused by COVID. The 2021\neconomic rebound saw imports climb to nearly $3.4 trillion, a record high. The\nincrease in imports between 1980 and 2021 equates to a compounded annual growth\nrate of 6.1%. The growth rate of imports has exceeded the U.S. economic growth\nrate. Between 1980 and 2021, U.S. GDP grew from $2.857 trillion to $22.993\ntrillion, a compounded annual growth rate of 5.2%.<\/p>\n\n\n\n

After peaking at 13.5% in 1980, the\naverage annual inflation rate generally declined until a rebound late in the\n1980s. In 1990, inflation rose to 5.4% and in 1991 declined slightly to 4.2%.\nBetween 1992 and 2020, inflation never exceeded 4.0% and exceeded 3.0% in only\nsix years. Since the early 1990s inflation has been relatively low. After 1992,\nthe annual inflation rate did not exceed 4% until 2021, when it ended the year\nat 7%. A contributing factor to low inflation has been globalization, as demonstrated\nby the volume of U.S. imports of goods and services. <\/p>\n\n\n\n

Since the 1980s, global supply chain\nnetworks have evolved for many companies and industries. Companies can source\ninputs and products globally to minimize costs, maximize profits, and expand\nmarkets. The minimization of costs through globalization has contributed to a\nrelatively low, sustained long-term inflation rate, particularly since the\nearly 1990s, and particularly in manufacturing. The Conference Board<\/em>\nestimated that in 1997 hourly compensation costs in manufacturing for Mexico\nwere only 11% of what they were in the United States. In 2016, hourly\ncompensation costs in manufacturing for Mexico were only 10% of what they were\nin the United States. Hourly compensation costs in manufacturing for China were\nestimated at less than 5% of U.S. costs until 2009 but were still only 11% of\nU.S. costs in 2013. The bottom line \u2013 low-cost sourcing options for companies contributed\nto low inflation for consumers. <\/p>\n\n\n\n

Globalization and Supply Chains<\/h3>\n\n\n\n

COVID introduced never before seen\nsupply chain interruptions and highlighted how these interruptions can\nnegatively impact businesses, cause product shortages, and contribute to\nincreased inflation for consumers. U.S. firms relying on foreign sourced inputs\nor products were particularly vulnerable to supply chain disruptions. Although\ncost had been a primary factor in considering foreign sourcing, COVID\nintroduced a new factor to consider \u2013 product availability.<\/p>\n\n\n\n

Globalization, as reflected by the volume of U.S. imports of goods and\nservices, contributed to sustained, relatively low inflation particularly since\n1990. However, it also contributed to a decline in manufacturing employment,\nwhich has particular consequences when products are foreign sourced and supply\nchains are interrupted. <\/a><\/p>\n\n\n\n

The blue\nline in Chart 2 below indicates the number of employees in manufacturing from\n1939 through 2021. The red line indicates the number of employees in\nmanufacturing divided by total non-farm employment from 1939 through 2021 – the\npercentage of people employed in the manufacturing sector. <\/p>\n\n\n\n

From 1939\nthrough 1979 the number of people employed in the manufacturing sector\ngenerally increased, from a level of 9.3 million in 1939 to a peak of 19.5 million\nin 1979. Globalization, as reflected by the volume of U.S. imports of goods and\nservices, began ramping up in the 1980s. That contributed to a downward trend\nin manufacturing employment that began in 1980. Although manufacturing\nemployment rebounded slightly in the 1990s, the downward trend returned after\nthe turn of the century with a sharp decline that generally continued through\nearly 2010. After hitting a low of 11.5 million in early 2010, manufacturing\nemployment generally grew each year throughout the entire decade, with only\n2016 and 2019 having relatively unchanged manufacturing employment.  Despite the growth in manufacturing\nemployment during the economic expansion, the manufacturing sector ended the\ndecade with almost 1 million fewer employees than what it had before the\nfinancial crisis. Manufacturing employment was 12.9 million in December 2019\nbefore COVID, almost a 40% drop from the peak employment in 1979 and a 6.5%\ndrop from the October 2007 level of 13.8 million. <\/p>\n\n\n\n

As a percent\nof total employment, manufacturing employment peaked during World War II in\nOctober 1943 at 38.9%. However, after peaking in 1943, the percentage of people\nemployed in the manufacturing sector has generally been on a long and steady\ndecline. By early 1980, manufacturing employment comprised slightly more than\n21% of total employment. The recent decade began with manufacturing employment\ncomprising 8.8% of total employment; the decade ended with manufacturing\nemployment comprising only 8.5% of total employment. That compares to\nmanufacturing employment comprising 13.8% of total employment in October 2007,\nbefore the economic downturn caused by the financial crisis. Economic growth,\nsignificant corporate tax breaks from the 2018 tax bill, and tariffs and trade\nwars could not return manufacturing employment to the pre-financial crisis\nlevels of 2007.<\/p>\n\n\n\n

The\nUnited States began a tariff and trade war with China (and other countries) in\n2018 that continued into 2019. Despite the implementation of significant tariffs with\nthe goal of returning jobs to the U.S., manufacturing employment in the U.S.\nremained relatively unchanged at 12.8 million in 2019. A\nkey benefactor of that trade war with China was Vietnam. U.S. corporations\nwanting to avoid paying the tariffs on Chinese sourced products looked\nelsewhere for sourcing. Although merchandise imports from China declined in\n2019, merchandise imports from Vietnam exploded. Merchandise imports\nfrom Vietnam began the last decade at $14.8 billion and grew to $49.2 billion\nin 2018. However, in 2019 imports from Vietnam grew 34.6% to a record high of\n$66.6 billion, an increase of over $17 billion from 2018. In 2021, merchandise\nimports from Vietnam were just under $102 billion, twice the level of 2018. In\nother words, increasing costs to U.S. corporations through tariffs on Chinese\ngoods did not significantly return jobs to the U.S. Instead, in many instances\nU.S. corporations pursued alternative low-cost sourcing options, like Vietnam. <\/p>\n\n\n\n

Chart 2: Manufacturing Employment and<\/strong> Manufacturing\nEmployment as Percentage of Total Employment 1970-2021<\/strong><\/p>\n\n\n\n

\"Chart
Source: Federal Reserve FRED Database; Bureau of Labor Statistics<\/em><\/figcaption><\/figure>\n\n\n\n

Globalization contributed to a shifting<\/em>\nof employment in the U.S., from the manufacturing sector to the service sector.\nChart 3 shows service provider employment (blue line), manufacturing employment\n(red line) and imports of goods and services (green line) from 1970 through\n2021. Similar to imports, total employment generally consistently grew over the\nentire period. When U.S. manufacturing employment peaked at 19.5 million in\n1979, total employment was nearly 90 million. By 2021, manufacturing employment\nhad declined nearly 40% to 12.3 million while total employment increased by\napproximately 60% to 146 million. Low-cost foreign sourcing of products\ncontributed to a reduction in manufacturing employment but also contributed to\nan increase in service sector jobs.<\/p>\n\n\n\n

Chart 3: Service Employment, Manufacturing Employment and Imports of Goods and Services<\/strong> (1970-2021<\/strong>)<\/p>\n\n\n\n

\"Chart
Source: Federal Reserve FRED Database; Bureau of Labor Statistics and Bureau of Economic Analysis<\/em><\/figcaption><\/figure>\n\n\n\n

The Future <\/h3>\n\n\n\n

COVID provoked unprecedented supply\nchain disruptions and has caused many companies to rethink supply chains and foreign\nsourcing. However, there was a reason why supply chains were set-up the way\nthey were in the first place.  Companies\ncould source inputs and products globally to minimize costs, maximize profits,\nand expand markets. In many instances, foreign sourcing lowered costs for\ncorporations and prices to U.S. consumers. In the 1980s, just-in-time inventory\nmanagement grew in popularity, which featured receiving inputs when they are needed\nfor the production process rather than stockpiling needed goods. Just-in-time\ninventory management reduced costs, but increased exposure to any potential\nsupply chain disruptions. COVID disrupted supply chains and foreign sourcing,\nwhich led to product shortages, increased costs for firms, and increased prices\nfor consumers. <\/p>\n\n\n\n

COVID driven supply chain\ninterruptions and inflation are a global problem. According to the Organisation\nfor Economic Co-operation and Development, the annual inflation rate for the\nEuro area was 5.0% in December. Greece, Germany, Ireland, Belgium, the\nNetherlands, and Spain all had annual inflation rates exceeding 5.0%.<\/p>\n\n\n\n

Exactly how and if companies\nsignificantly change supply chains only time will tell. Although lower costs\nwere an incentive for foreign sourcing, an important consideration since COVID\nis product availability. Just-in-time inventory management may be transformed\nto just-in-case inventory management, at a cost. Just-in-case inventory\nmanagement features alternative and\/or multiple sourcing options, and a greater\nfocus on customer relationship management. Increasing U.S. sourcing could limit\nsupply chain interruptions but would not be without challenges. Absent COVID\nrelated supply issues, changing a supply chain to focus on U.S. rather that\nforeign sourcing could increase costs relative to the foreign sourcing, and\nsubsequently prices to consumers, unless a company is willing to absorb the\nincreased costs However, the benefit of U.S. sourcing could outweigh the\npotential costs of any future supply chain disruptions. Certainly there are\nother factors that affect profitability and pricing, such as automation and\nproductivity, but again, there is a reason why supply chains were initially\nset-up the way they were. <\/p>\n\n\n\n

There are also labor market\nchallenges for shifting supply chains back to the U.S., as the job market was\nstrong pre-COVID and the job market has strongly rebounded with the economic\nrecovery. Despite the\ngeneral decline in manufacturing employment, the pre-COVID peak in total U.S.\nemployment was 152.5 million in February 2020 with a pre-COVID unemployment\nrate low of 3.5%. After employment dropped to only 130.2 million in April 2020\nand unemployment skyrocketed to 14.8%, the economy and job market have strongly\nrecovered. In January 2022, the unemployment rate was 4.0% and employment\nrebounded to nearly 150 million. Although there remains room for the labor\nmarket to grow, pre-COVID employment was strong with a low unemployment rate and\nthe economic rebound since early 2020 has created strong employment with a low\nunemployment rate. The challenge will be to create an increasingly attractive\nlabor market for all potential employees. <\/p>\n\n\n\n

Ultimately, it is up to U.S. firms where to source\ninputs and products, and up to U.S. consumers what products to buy. COVID has\ncaused many firms to rethink supply chains and sourcing; ultimately, U.S.\ncorporations and consumers will decide what actually changes.<\/p>\n\n\n\n

For further information:<\/strong><\/p>\n\n\n\n

  1. Info on inflation from the Federal Reserve Economic Database (FRED): FRED Database – Inflation<\/a><\/li>
  2. From the Conference Board, info on international manufacturing costs: International Compensation on Hourly Compensation Costs in Manufacturing<\/a><\/li>
  3. Info from the Bureau of Labor Statistics:
    1. Economic Situation<\/a><\/li>
    2. Unemployment Rate<\/a><\/li>
    3. All Employees, Nonfarm Payrolls<\/a><\/li><\/ol><\/li>
    4. Historical import and net export info from the Federal Reserve Economic Database (FRED):
      1. U.S. Imports<\/a><\/li>
      2. FRED Database: U.S. Net Exports<\/a><\/li><\/ol><\/li>
      3. Info on trade from TradeStats Express<\/a><\/li>
      4. From the U.S. Census Bureau – U.S Top Trading Partners \u2013 Exports, Imports, Surpluses, Deficits: Foreign Trade – U.S. Trade<\/a><\/li>
      5. From the Organisation for Economic Co-operation and Development (OECD): Global Inflation<\/a><\/li><\/ol>\n\n\n\n
        \"Kevin<\/figure>
        \n

        Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight<\/a> in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point. <\/p>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

        Inflation has been a relatively hot topic of discussion with the annualized inflation rate hitting 7.5% in January, the highest rate since the early 1980s. Inflationary pressures resulted from a combination of increased demand as the economy rebounded from COVID, and reduced supply because of COVID related supply chain issues. This blog will look at […]<\/p>\n","protected":false},"author":136,"featured_media":11672,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,7,527,12],"tags":[576,305,583,342,343,344],"_links":{"self":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/11666"}],"collection":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/users\/136"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/comments?post=11666"}],"version-history":[{"count":4,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/11666\/revisions"}],"predecessor-version":[{"id":11674,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/11666\/revisions\/11674"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media\/11672"}],"wp:attachment":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media?parent=11666"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/categories?post=11666"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/tags?post=11666"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}