The economy is booming. That’s a surprise to many, after the financial devastation brought on by the shutdowns. There is now a blizzard of economic activity across all sectors. The primary reason for this is all the money injected into the economy by the US Government. It's been dizzying and unprecedented.
- Hundreds of billions of dollars in forgivable PPP loans
- Three rounds of stimulus checks
- $600 a week top up of unemployment benefits
- Loans, grants and funding for all types of businesses, from airlines to restaurants
- The Federal Reserve's quantitative easing continues to the tune of $170 billion a month
We're talking trillions of dollars. To put it in perspective, the stimulus passed during the 2008-2009 great recession cost $800 billion. This article is not about whether these stimulus measures are right or wrong. It’s about the undeniable effects of them, and possible final outcome.
Shutting down our country's economy was something never really done before. It can certainly be referred to as unnatural and extreme. In a free market, such a thing isn't even conceivable. Also, dumping this much government money into the economy is unnatural and extreme as well. While there is always government spending, this is a mind boggling amount of money. Both moves can be considered unnatural and extreme. One can only expect an extreme outcome.
We're already seeing this with inflation. Prices are rising across the board. From the basics like gas and food, to commercial needs like lumber and paper. So far this year, gasoline has gone up 34% - and we're not even at peak summer driving season yet. It’s rising at an alarming rate. Year over year the consumer price index is up 4.2%. The producer price index is up 6.2%. Why? There are a myriad of reasons.
What is inflation? Basically, more money chasing the same amount of goods. This causes prices to go up. It also causes manufacturers to make more, creating more demand for raw materials, making their prices go up. It's a vicious cycle.
In addition, there are other things fueling this. The supply chain is still a mess, meaning less goods can be made. Also, understaffed businesses can't produce as much. Many people have not returned to work, even though there are jobs available. There are a myriad of reasons for this. The unemployment top up is one. And maybe if businesses focused more on culture, work/life balance and paid people better, they would be more eager to return to work. (But this is a topic for another blog post). Since some people have more money in their pocket, they're going to spend it - making an increase in demand. For example there is a shortage of cognac! More people have traded up since they have more money. And a shortage means prices will go up.
With my business, we started seeing significant price increases at the beginning of March. All of our paper suppliers and media suppliers communicated to us that prices would be rising. One even warned us to "brace for more". We're not talking pennies here, either. Coroplast went up by 42%, as did foamcore. Our shipping costs have gone up quite a bit as well. Even our packaging - the box of padded envelopes we use to ship small print jobs went up 50%.
So, you can understand how inflation begets more inflation. Businesses will have to raise their prices and the cycle continues. To escalate matters, we're experiencing a global economic recovery- as most nations and central banks have juiced their economies. Usually the world economy is not in sync like this.
What happens next? The economy runs hot and eventually overheats. What does that mean? We're only in the beginning now. Strong consumer confidence, all this free money from the Government and pent up demand from the shutdowns means people are out spending money and happy to do so. This summer is going to be a hot one, for the economy. People spending on everything from vacations to concerts to cook outs, and all the other things we weren't allowed to do the previous summer.
Businesses, flush with cash from the government are spending to grow their business and increase inventories to make up for lost time and prepare for input costs rising.
In addition, this summer the unemployment top up will expire. This means many people will be looking for jobs and return to work. Due to the increased demand, there will be plenty of jobs. Unemployment is already low, considering what we've been through. It will be even lower this summer. You would think that’s a good thing, and normally it is, but it means even more money will be out there chasing goods and services- fueling inflation.
Wages will also increase. It’s happening now as employers struggle to find workers. Wawa is offering a $500 signing bonus after staying on the job for 90 days. Again, you would think wages increasing is a good thing, and again- normally it is. But, this situation is not normal. Increased wages and low unemployment will add even more fuel to the overheating economy.
What will eventually happen is a sharp reversal in consumer confidence, followed by an unnatural and extreme recession.
The ironic thing is that the Federal Reserve's mandate is for low unemployment and inflation at 2%. The Fed has clearly stated that they are going to let inflation go beyond 2% because it is simply "transitory". At the onset of the great recession the Federal Reserve said the problem was "transitory" and home values may decline 10%. They were dead wrong - and they're likely wrong this time as well.
I'm not trying to be all doom and gloom. I'm just trying to discern what’s going on and where it will lead us. As a business owner, one has to be prepared. One needs to examine how inflation will affect their business and their clients, then adjust accordingly. Focus on what you can control and of course stockpile cash in your war chest. Regardless of how this plays out, the sun will rise each morning and business will take place. The best thing you can do is to be prepared and don't lose sight of your day to day operations. There is still money to be made! If your business survived the shutdowns, your business can get through this.