News from: CalChamber

By now, Americans are used to hearing about some type of shortage. In the early days of the COVID-19 pandemic it was toilet paper and face masks. Then came the shortage of household cleaning supplies, packaged meat, and even coins. But over the last six months, supply chain interruptions and labor shortages have roiled businesses and entire industries, threatening the country’s economic rebound. Some of the industries most affected are major drivers in California’s economy, spanning technology, construction, manufacturing, services and real estate.

High Demand, Low Supply

Almost 60% of Californians have been fully vaccinated and the latest consumer confidence index reveals California shoppers’ appetite for manufactured goods is higher than before the pandemic started. This is all good news for businesses eager to open up their shops and start recouping the losses from the pandemic, except that businesses cannot find workers.

Labor scarcity is plaguing every industry and state, leading to an all-time record 8.3 million job openings in April. The shortage is hitting the services sector especially hard. In fact, The Associated Press reports that the state’s restaurant industry remains about 450,000 jobs below its pre-pandemic level. And there’s not just a shortage of cooks, bartenders and food servers—many sectors are struggling to fill jobs too, including construction, home health care, retail and transportation/deliveries.

As if the labor crunch wasn’t enough, industries are also experiencing shortages in key raw materials. This scarcity of raw materials is reverberating across supply chains as these commodities are often not only end products in and of themselves, but are part of other products as well. Semiconductor chips, for example, can be sold individually to consumers who want to expand their computer’s memory capability, but they also are an essential component for cars, appliances, TVs, LED bulbs, cameras and more. This shortage is particularly worrisome in California, as computers and electronic products are California’s top export, accounting for 24.1% of all the state’s exports in 2020.

The semiconductor global shortage is also taking its toll on car manufacturers and appliance makers. Appliance makers have responded by postponing the release of certain products, such as smartphones, or prioritizing which products are manufactured first, moving low-margin products such toasters and washing machines to the back of the queue.

The automotive sector remains one of the hardest hit by the semiconductor shortage, and some companies have had to shut down factories, reduce production, and lay off workers. The disruptions, coupled with high consumer demand, have pushed up the price of used vehicles and used appliances.

Other top sectors taking a hit are construction and real estate, as acute shortages in lumber, steel and cement are pushing the price of remodeling projects and home construction to unprecedented levels. The price of lumber exploded this year to more than 300% of what it was a year ago, and steel tripled in price. The price of these commodities is so high that some home builders in the state have decided to either decrease the number of homes being built or ceased construction altogether. Other builders passed on the increase to homebuyers, in some cases increasing the home sale price by $40,000.

Disruptions Are Transitory

Just as the pandemic was and is hard to predict, projecting when these shortage disruptions will ease is also difficult. Economists and industry experts anticipate that most of these shortages (such as labor, lumber and semiconductors) will ease by fall and toward the end of the year.

Data suggests that manufacturers anticipate current supply-chain issues will have abated within approximately six months, according to information released by the White House.

Global Shipping Disruptions

Another issue causing headaches for businesses is the congestion plaguing the global shipping industry.

A weeklong blockage of the Suez Canal in March pushed back some deliveries by a month, and in May a COVID-19 outbreak forced the closure of one of the world’s busiest ports in the Guangdong province of China. These slowdowns and congestion issues at U.S. ports, particularly at the Los Angeles and Long Beach ports, exacerbated supply chain shortages, delaying deliveries by weeks at a time and pushed up the cost of moving sea containers from China to the U.S. And the price increase has not abated since—in fact pricing has only gone up.

According to Freightos Baltic Index, the price last month to ship a 40-foot sea container from China to West Coast ports was $5,165 compared to $1,461 in January 2020. The price is currently at $6,217—a 325% increase from what companies were paying in January 2020.

A recent Chinese port logjam made headlines last week, leading to speculation that shipment delays will hurt the year-end holiday shopping season. Moreover, the Wall Street Journal reported that the Los Angeles and Long Beach ports are still backed up, and companies have reported growing delays in moving goods inland due to congestion and freight equipment shortages.

Although shipments coming out of China are being diverted through different terminals to speed up shipping lines, the explosion in consumer demand, current bottlenecks at U.S. ports and surge of incoming shipments are leading some industry experts to anticipate the disruption in global shipping to continue through Christmas, and potentially for another 12 months.

Supply Chain Report

In June, the White House released the findings of a 100-day review of critical supply chains ordered by President Joe Biden and outlined a series of actions to address the supply-chain vulnerabilities it found. The report focused on four critical products: semiconductor manufacturing and advanced packaging; large capacity batteries, like those for electric vehicles; critical minerals and materials; and pharmaceuticals and active pharmaceutical ingredients.

The report found five common themes contributing to supply chain vulnerabilities:

1. Insufficient U.S. manufacturing capacity;
2. Misaligned incentives and short-termism in private markets;
3. Industrial policies adopted by allied, partner, and competitor nations;
4. Geographic concentration in global sourcing; and
5. Limited international coordination.

Guided by the report, a Supply Chain Disruptions Task Force has been established to monitor and address short-term supply issues. According to the White House, this task force is convening meetings of stakeholders in industries with urgent supply chain problems, such as construction and semiconductors, to identify the immediate bottlenecks as well as potential solutions.

In the long term, the Biden administration proposed a variety of actions to strengthen the United States’ industrial base, increasing resilience and reducing lead times to respond to crises. According to the White House, the administration is recommending that Congress support at least $50 billion in investment to advance domestic semiconductor manufacturing and research.