How Supply Chain Issues and Inflation Are Impacting the U.S. Economy

Economic experts shared how the U.S. will recover from supply chain issues and inflation as well as what businesses can expect in the next few years.

Air Date: May 18, 2022

Moderator: Darby Dunn, Founder, Darby Dunn Communications

Featured Guests: Joe Brusuelas, Chief Economist, RSM US LLP, John Drake, Vice President, Transportation, Infrastructure, and Supply Chain Policy, U.S. Chamber of Commerce

It’s no secret the United States economy has encountered multiple obstacles in 2022. As inflation and ongoing supply chain challenges continue threatening the economy, individuals and businesses alike are struggling to stay afloat.

During RSM and the U.S. Chamber's “The Real Economy: Supply Chain, Inflation, and Your Business” event, economic experts shared how the U.S. will recover from supply chain issues and inflation as well as what businesses can expect in the next few years.

Reaching Price Stability Will Likely Take Years

With inflation continuing to rise, the economy is showing signs of instability.

“The really important thing to remember is price stability is a precondition of maximum sustainable employment, growth above the long-term trend of 1.8%, and financial conditions that don't threaten to upend the economy,” said Joe Brusuelas, RSM Chief Economist. “We're going to see an economy that’s going to continue to decelerate back towards trend growth later this year on the back of a very aggressive set of rate hikes by the Federal Reserve and the drawing down of its balance sheet.”

Brusuelas noted that the Fed's interest rate will likely reach 3% by the end of 2022.

“This is in order to bring down inflation and hedge against some of the uncertainties around … the direction and the price of oil and energy linked to what's going on in Europe and Ukraine and Russia, and then second, the ongoing supply chain issues out of China,” Brusuelas continued.

Additionally, according to Brusuelas, because China did not adopt a vaccine regime, other countries are paying the price for it now.

“We're in a period of uncertainty over the direction of pricing,” he said. “While I think it's falling, I just don't think we're going to get back to where we think price stability is, at around 2%, probably for another good two to three years.”

The U.S.’s Most Popular Ports Rank Low in Terms of Productivity

John Drake, VP of Transportation, Infrastructure & Supply Chain at the U.S. Chamber of Commerce, indicated the last significant labor stoppage occurred in 2002 and lasted for approximately nine days, yet impacted the supply chains for a series of months.

“This all comes down to how productive the ports can be,” he said. “The Ports of L.A. and Long Beach are arguably the two most important ports in the United States … because approximately 40% of all containers that come to the United States come into those two ports.”

However, according to research by the World Bank, “if you look at how those two ports rank in terms of productivity in the world, how quickly they're able to move containers off the ship and get them underway, the Port of L.A. ranks 328th in the world and the Port of Long Beach rates 333,” said Drake.

Stagflation Is a Growing Concern for the U.S., But It Is Not Yet Here

Though experts fear the U.S. is on the cusp of stagflation, Brusuelas does not believe stagflation is here just yet.

“Stagflation is defined as slow growth, high unemployment, and high inflation,” he said. “We have growth, which is still fairly solid, [and] high inflation, but unemployment remains low.”

According to Brusuelas, the Federal Reserve must hike the federal fund rates to where the rate is restrictive, then continue to decrease its balance sheet.

“My estimation is that over the next two and a half years, the balance sheet will be reduced by about $3 trillion,” he said. “It's already caused the market to increase long-term rates by 50 basis points.”

“The Federal Reserve intends to obtain price stability,” he continued. “Price stability is a precondition of maximum sustainable employment. [If] we go from 0% to 3% in just a very short period of time, the economy will slow.”

According to Brusuelas, the real question is: “will they bring it in for a soft landing, or will we have a short and shallow recession?”