US inflation figures for June hit 9.1 percent year-on-year, climbing 1.3 percent from May and significantly exceeding expectations of 8.8 percent. The growth was driven in large part by skyrocketing food and energy costs, but core prices were up a whopping 5.6 percent in their own right. Even before those inflation figures had been released, the International Monetary Fund cut its growth projections for the US economy and raised its unemployment-rate estimates through 2025, warning of “systemic” inflation risks. The previous projection of 2.9 percent US growth for 2022 was lowered to 2.3; 1.7 percent for 2023 to 1.
Needless to say, this is, all, bad – if unsurprising – news. The even worse news is that there is no end in sight. The Fed is signaling it will hike interest rates by at least another 75 basis points this month, but that will not address the fundamental supply shortage driving today’s inflationary trends. It might even exacerbate it. Yes, gas prices are slightly down, however that risks being a pyrrhic victory. The US, its allies, and its partners continue to depend on unpredictable, even adversarial sources for their energy needs – and really, all their needs. President Biden left the Middle East last week without any concrete progress on an oil production agreement; the Texas power grid is straining under heat wave; and instead of filling the yawning supply gap, instead of doubling down on production, US companies are balking, scared off by the very economic trends that raise the imperative of domestic supply.
The US, its allies, and its partners continue to depend on unpredictable, even adversarial sources for their energy needs – and really, all their needs. Instead of filling the yawning supply gap, US companies are balking, scared off by the very economic trends that raise the imperative of domestic supply.
The US is in a gut check moment. For decades, bad habits and complacency have become entrenched. The country has allowed itself to auction off domestic industry, and with it long-term economic growth and security, in exchange for short-term profits. Now, as the ramifications of that deal with the devil are being felt, the US must break its habits, not take false shelter in them.
In 2019, Peloton began manufacturing a portion of its bikes. In 2021, the company announced that it would build a new 400 million USD factory in Ohio. Peloton projected that in-house manufacturing would lead to lower prices for its products in the long-term – while also lessening the shipping delays and regulatory hurdles caused by reliance on overseas production.
But then, Peloton’s fortunes changed. As pandemic restrictions lifted, sales began to drop. The company responded in the long, storied tradition of American producers: By relinquishing control of its manufacturing, and the benefits of an industrial foothold, in favor of lower short-term costs. In February, Peloton announced it would abandon its Ohio plans. Last week, it announced it would give up in-house manufacturing altogether, shifting production entirely to Taiwan.
And markets looked favorably on the move. Peloton shares went up 3.7 percent following its announcement last week, recent buzzwords of “deglobalization” and “reshoring” be damned.
It’s not just Peloton, either. With the major US semiconductor bill stalled in Congress, Intel has delayed next steps on its 20 billion USD facility in Ohio (though don’t worry: Intel’s Intelligent Manufacturing Pilot Plant Project in Suzhou, China was successfully launched in March.)
US companies need to stick their necks out a little. They need to factor in the imperative, for them and for the country, of surviving next decade, not just next year, and make upfront investments in production.
As supply chains have tied themselves in knots over recent years, and as a new era of globalized great power politics has turned international trade into a competitive battlefield, the US has increasingly begun to talk the talk of domestic production. Today’s inflation challenge should accelerate this trend, and corresponding investment: The US is in a crisis of supply. To fix it, to fix inflation, the US needs to raise production to meet demand.
But that isn’t happening. Because even if market makers are waxing eloquent on “the end of globalization,” they’re not actually making the markets around it. There is no investment to back up the talk. And with economic headwinds picking up pace, no one is willing to start the ball rolling, to make the large-scale capital expenditure that production needs – even if doing so is the only way to fight the headwinds.
Today’s spiraling economic crisis is not a passing affair. Nor is it a fluke one-off. It’s the product of decades of economic policy and calculus that have bartered, poorly, the foundation of America’s economy for a couple years of inflated earnings. With the consequences now taking shape, the US needs to change course, immediately – even if doing so demands more effort than staying the ill-fated course.
US companies need to stick their necks out a little. They need to factor in the imperative, for them and for the country, of surviving next decade, not just next year, and make upfront investments in production.
At the same time, Washington needs to adopt a supply-based policy, at home and abroad. Domestically, it needs to make it possible for companies to take this leap, through incentives for production (and disincentives for lack thereof), decreased red tape, and partnerships in those critical areas that demand greatest upfront investment. Internationally, Washington needs to focus what leverage the US has on marshaling supply – by bringing tough targets like Saudi Arabia on board, while also coordinating with more traditional allies and partners to invest in supply.
This is the storm before the big storm. The US needs to step up, not hunker down.
(Photo by Pexels)
