Not since World War II ended has America’s supply chain experienced the degree of disruption that it is today as the economy emerges from the pandemic in fits and starts. Indeed, a raft of recent commentary drawing comparisons of today’s herky-jerky reopening to 1970s stagflation or the Roaring 1920s may be focusing on the wrong decade.
Circumstances were very different 75 years ago in the late 1940s, but supply chain bottlenecks spawned severe inflation. For the 12 months ending in March 1947, the Consumer Price Index soared 20.1% as wartime price controls and rationing were lifted. This rampant inflation proved to be short-lived, and the CPI fell 2.9% for the 12 months ending July 1949. Still, inflation averaged 5.8% for the decade between 1941 and 1951, according to the Bureau of Labor Statistics, before petering out in the 1950s.
Back then, the challenge was the demobilization of millions of troops and a shift from a wartime to a peacetime economy. Today, the problems revolve around reopening an economy scarred by the trauma and mandated shutdowns of a public health crisis. For better or worse, the U.S. is leading the way again as the rest of the world appears to be lagging behind in vaccinations, a key recovery metric this time around.
Most baby boomers nostalgically but inaccurately view the post-World War II era as one of brisk economic growth. In reality, GDP growth averaged 1.8% from 1945 through 1953 under President Truman and 2.4% from 1953 to 1961 under President Eisenhower, according to data compiled by Bloomberg Opinion’s Justin Fox. America’s population did boom, but the bulk of that gain came from babies, not the most productive citizens.
On a socio-political level, turbulence was equally pervasive 75 years ago. In 1946, Republicans won 54 seats in the House of Representatives and 11 seats in the Senate, taking control of both chambers. Two years later, Democrats retook both with gains of 75 House seats and nine in the Senate.
Markets Snicker At Inflation Fears
A major disconnect perplexing asset managers is the refusal of the bond market to recognize the rampant price inflation Americans are experiencing in many of their daily activities. Many blame the Federal Reserve for maintaining artificially low interest rates. Others buy into the Fed’s argument that current price trends are “transitory.”
Factors besides central bank manipulation may be at play. Manhattan Institute economist Allison Schrager notes that if bond traders turn out to be dead wrong it would hardly be the first time. After trends like low interest rates and inflation have been entrenched for so long, markets may fail to realize a sharp shift when it surfaces.
Simple supply-and-demand dynamics are also driving markets. Loomis Sayles Vice Chairman Dan Fuss says his firm’s bond traders see a steady stream of money flowing into U.S. markets from East Asia. In the 1930s, European investors facing darkness loom over their continent poured money into the U.S. and Canada. Today, China’s crackdown on wealthy business owners is rippling throughout its neighborhood.
Corporate America’s love affair with just-in-time inventory is over. Fuss notes many companies were seeking to bring their supply lines closer to home for several years before the pandemic, and that will increase costs.
As America emerges from the pandemic, many economists are starting to think that while commodity inflation may be short-term, wage inflation, which isn’t subject to the same up and down swings as raw goods and materials, will stick around. Structural changes in the labor market are likely to determine the shape of both inflation and the recovery as workers gain negotiating power from looming labor shortages.