Dude, you’re not getting a Dell for Christmas

Partha Chakraborty-

Partha Chakraborty

Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.

In the early 2000s, Dell Computer used to run a series of commercials where Ben Curtis, the pitchman, would extol its virtues, ending with an exceedingly irritating “Dude, you’re getting a Dell”. Irritating or not, it had a high brand recall and worked on me – my first desktop computer was a Dell bought on a Christmas deal. Ben lost his job on a marijuana-related offense and moved on. If Ben were to remake the same commercial today, the tagline could well be “Dude, you’re not getting a Dell for Christmas”. This pitch will be as irritating as the last, infuriating more people because he may actually be right this time.

 

As you drive down Pacific Coastal Highway (PCH), you are blessed with views of the blue Pacific Ocean. These days your vista will have specks of large container ships waiting to berth at the ports of Los Angeles and Long Beach. There were 64 ships in a holding pattern as of Oct 17, 2021, slightly down from 69 ships a few days before. Before the pandemic, a single ship at anchor was unusual. 497 large container ships waiting to dock outside ports in Asia, Europe and North America combined.  Not that US Ports are having a labor dispute. When they operate 24X7 soon, the two ports in LA, handling almost 40% of the nation’s inbound cargo, are expected to handle 80% more containers than the comparable period last year. Major US ports are expected to handle 25.9 million TEU (twenty foot-equivalent units) in 2021, breaking the last record of 20 million set in 2020. As ships wait over two weeks in the ‘traffic jam’ in LA, the picture on the other end is no better, ships arriving in Chinese ports must quarantine for a week. These delays more double time for a Shanghai to LA one-way trip from two weeks normally. Cost of shipping has gone through the roof, heavily trafficked China-US routes have seen prices more than double since pandemic lows, less busy routes’ prices jumped many times more. It is cheaper to send an empty ship back from LA than to have it wait further for return cargo.

 

It is not just the shipping that is holding things up. Covid, curtailed magnesium production because of emission concerns in China have wreaked havoc on chip manufacturing worldwide, e.g., which in turn ravaged auto manufacturing in Germany and the US, and auto-supply worldwide. Chip shortage caused a drop in production by 7.7 million units worldwide, a full 10% of previously projected output, or about $210 billion in revenue. German industrial production dipped 9% compared to pre-pandemic levels, largely due to auto and auto-parts industry slump. Similar stories are heard in pretty much all parts of a globally interconnected economy, if not at that scale.

 

There’s more. Labor participation rates have tanked in the US, at 61.6% it is the lowest since the early 1970’s, down significantly from 63.3% as of Feb 2020. As a result, the US is short of 4.3 million workers, even if there are over 10 million job openings listed in the wake of heavy consumer demand. A Wall Street Journal poll of 52 economists, 22 predicted the participation rate would never return to pre-pandemic highs, signaling a tectonic shift in US economy. Domino’s reported that delivery wait times spiked 30% in July and stayed there, indicating a shortage of truck drivers. That shortage parallels all blue-collar and lower-skilled service jobs with a traditionally high turnover rate. Service workers are quitting, or not returning, as they are tired of closures, including an expectation they’ll police mandates upon customers already angry living under it for months. Labor market friction is driven in part by fear of the pandemic returning, some by a realization that money was not worth the hassle, especially with incentives originally designed to make them stay at home. Long-haulers so critical to ease port logjam are job-hopping, keen to squeeze whatever leverage they have in a hot market. White-collar workers are quitting in record numbers too for similar reasons.

 

Consumers with petty cash – a typical US family was given thousands in all forms of fiscal programs over the pandemic – have fewer places to spend it as people are getting (not) used to changing protocols. Movie theaters, even when open with potential blockbusters, are clocking feeble attendance – the much-awaited 007 sequel netted a meager USD 65 million the first weekend in the US, as opposed to over 150 million anticipated. As a result. consumers are buying goods that are delivered to their doors – from LOL toys to big-screen TVs, home renovations to home décor, Netflix bundles to Peloton bikes. That feeds pressure on the manufacturing networks and the supply chain, thereby completing the circle.

 

If you thought there is no easy end to this self-perpetuating cycle of woes, you are right. Almost one in six economists expect the supply chain bottleneck to continue into 2023. In the immediate term, the shortage is translating into higher prices. Demand has shifted from new to used cars whose prices have spiked 40% or more in the US. Housing prices are rocketing from both push and pull – rising lumber prices add USD 36,000 to a typical new home cost in the US at the same time consumers are looking to find a more expansive home, presumably in suburbs than in cities, after the pandemic. Rents have spiked too though, thankfully, evictions did not after the end of a moratorium. Big box stores have started to limit purchases, first time this year, a first step before they resort to price hikes; even some hotels are not offering turn-down service except when requested. CPI stood at 5.4% year-on-year, and economists expect that high level to through the end of the year, the first time since early 1991 when inflation sustained at such high level. For context, inflation averaged at 1.8% for the decade before Covid hit.

 

Even if consumers are feeling all gung-ho about the next purchase, rising prices surely will tamp that feeling because inflation erodes purchasing power. Economists slashed projected fourth-quarter growth to 4.8% from 5.4%. Chinese economy expanded 4.9% year-n-year in third quarter of 2021, a sharp drop from 7.9% last year same period. IMF too lowered forecast for global growth this year to 5.9%. Business owners largely cited supply-chain bottlenecks as the biggest threat to growth in the next 12 to 18 months, twenty percent pointed to labor shortages.

 

That brings us to the Fed, whose dual mandates are to keep inflation in check and to keep unemployment low. Usually deft at handling multiple competing priorities this time might be too risky for Powell, the Fed Chair, to ignore frothing inflationary pressures. History is rife with examples of hyperinflation creeping in even if at the beginning they all seemed like a short-term disruption for an identifiable cause – wars being the most common. Fed cannot afford that, not even a whiff of it, because if it clamps down fast it signals skeletons under the rug, spooking the market and the economic system, possibly engendering a catastrophic recession. A gradual rate increase will damp real estate and construction as well as large-ticket item purchases – all required to ease pressures on the system. That said, Fed moves will come too late in a normal course of action, which will cause even more damages which will make Fed action more imminent, and dire, spooking the market. US GDP dropped about 2.3% in 2020 from 2019, and it is still ways to go before it reaches previous levels. Any Fed action, or anticipation of it, will make it more distant and painful.

 

Nothing in this article is meant to imply anything good or bad about Dell Computer and its products, or its ability to deliver. Presumed ills of one computer maker with dispersed manufacturing relationships should omen similar misfortunes of hundreds, thousands. As we wait for the Fed to take note, or not, we will need other valves to open in easing off the pressure. I am beginning to move away from my previous view “Roaring 20’s are almost here, again!” anticipating the possible course of action by all parties, and consequences. I will expand in a series of future articles.

 

I hope you ordered your made-to-order PC in good time to arrive before Christmas. My sympathies if not.