Amid the Euphoria, a Headwind for the Economy
Author: Greg Valliere
April 30, 2021
THIS WEEK’S EUPHORIA — thanks to surging corporate profits, the exceptionally accommodative Federal Reserve, and lavish government spending — makes us wonder what might go wrong.
THERE ARE PLENTY OF THINGS TO WORRY ABOUT: The prospect of complicated new tax hikes, perhaps prompting investors to sell assets; the clear signs of inflation, which may or may not subside by fall; and what we call the “shortage economy,” affecting everything from gasoline prices to the lack of labor.
BUT THE GREATEST HEADWIND OF ALL may be the crisis in the semiconductor chip industry, where a lack of supply has affected not just the U.S. auto industry but also many tech companies. There’s no quick fix in sight from Washington.
SEVERAL MAJOR COMPANIES — including Apple and Samsung — stated in their earnings reports this week that the shortage will reduce their growth this summer. Apple said on Wednesday that a lack of chips is hampering production of iPads and Mac computers, potentially reducing its earnings in the second quarter by $3 billion to $4 billion.
THE AUTO SECTOR ALREADY HAS SHUT DOWN PRODUCTION, with Ford saying it expects to produce 1.1 million fewer vehicles this year because it cannot get enough chips. Ford expects to lose about half of its anticipated second-quarter production. Volkswagen said it will suspend production of Jettas and Tiguan SUVs in Mexico next month because of the chip shortage.
PART OF THE PROBLEM IS RISING DEMAND, but production has decreased after the winter freeze in Texas, fires in two Japanese production facilities, and a severe drought in Taiwan, where production depends on ample sources of water.
OFFICIALS IN THE BIDEN ADMINISTRATION are aware of the shortage and its implications and have called for $50 billion in federal funding to incentivize more domestic chip production, but it would take a couple of years for this to boost production. Many affected firms worry that the problem could get worse before it gets better.
WITH THE ECONOMY ON MONETARY AND FISCAL STEROIDS, the semiconductor shortage won’t crush overall growth, but it may reinforce a public view that shortages will persist. Watch gasoline prices — they affect consumer attitudes, perhaps more than any other factor — and like so many other commodities, prices are surging.
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