Good morning.
I wrote last week about conversations on-stage at the Most Powerful Women’s Summit in D.C. But what I didn’t write about was the topic that dominated many conversations I had on the sidelines: a broken supply chain. Business leaders were shuttling between Fortune’s event and the White House, briefing an administration that had newly discovered this could be the biggest threat to its economic and political success.
Anyone who has tried to buy a new car or a new sofa understands the problem. Cargo is piled up in containers outside ports around the world. Truck drivers and railways are backed up with endless waits for shipments. Behemoths like Walmart and Amazon have responded by booking all the spare shipping capacity through Christmas, leaving everyone else out of luck.
The immediate impact of supply chain woes falls on disappointed consumers who can’t buy the things they want for the holidays, and businesses which can’t make sales. But a secondary effect is already being seen in prices. Higher shipping costs eventually get passed on to consumers. Delays cause cost overruns for manufacturing and construction. The Biden administration trumpeted a recent agreement to keep the Los Angeles ports open 24 hours a day, but it didn’t trumpet the likely cost of getting longshoremen and warehouse workers to work those extra hours. Everywhere you look in this fiasco, pressure on prices is rising.
Is this just a temporary phenomenon, as the Fed keeps telling us? Well, everyone I talk with expects supply chain problems to continue well into next year. And even then, they say relief will come when Americans shift more of their post-pandemic spending from goods to services—meaning more burden on understaffed restaurants, hotels and the like. The labor market is as out of whack as the supply chain—we’ve become “a nation of people without jobs and jobs without people,” as Suzanne Clark of the U.S. Chamber of Commerce put it last week. Wages are rising even as prices are rising. That’s a good thing for low-paid workers—unless their pay increase gets eaten up by rising inflation, in which case they will keep demanding more pay. That means 2022 is shaping up to be a year of the kind of wage-price pressures we haven’t seen in four decades—posing a particular problem for the Fed just as it begins (far too late, in my view) taking the financial punch bowl away from a rousing economic party.
What keeps this from ending badly? Economists point to low inflation expectations—reflected in financial markets—as a positive sign. But market participants are less rational than economists think, and expectations could shift quickly as the bad news piles up. Higher productivity is also a positive sign, since it means companies don’t have to automatically translate higher wages into higher prices. But can productivity gains continue in the face of labor demands and supply chain bottlenecks? An ebbing pandemic also could lead the four million or more Americans who’ve withdrawn from the labor market in the past two years to jump back in. But will that happen quickly enough to cool price and wage pressures?
I won’t predict how this plays out. These are uncharted waters, and predictions in such circumstances have little value. But the odds favoring complacency seem long.
More news below.
Alan Murray
@alansmurray
alan.murray@fortune.com
TOP NEWS
Chinese economy
Chinese GDP grew 4.9% in Q3, which was slightly below forecasts, and significantly below the 7.9% growth in Q2. Helen Qiao, BoA's chief Greater China economist: "The investment side of demand is pretty weak, and the power crunch impact on the supply side is also pretty severe." Fortune
Metaverse development
Facebook is hiring 10,000 people in the EU to develop Mark Zuckerberg's "metaverse" virtual-reality project. Facebook: "The metaverse has the potential to help unlock access to new creative, social, and economic opportunities. And Europeans will be shaping it right from the start." Entirely coincidentally, Facebook's European ride is getting increasingly rough, thanks to whistleblower testimony and looming regulatory crackdowns. BBC
Saks e-commerce
Saks's fast-growing e-commerce business is reportedly likely to have an IPO in the first half of next year, at a targeted valuation of $6 billion—which is around three times the valuation it had when spun off in March. Wall Street Journal
BNPL crackdown
The U.K. is cracking down on the surging "buy now, pay later" industry, so Sweden's Klarna is beefing up its credit checks there. Klarna still isn't doing hard credit checks, but is releasing a voluntary feature that lets users share their income and spending data to figure out if they can afford repayments. CNBC
AROUND THE WATER COOLER
Delta Plus
Former FDA chief Scott Gottlieb would like to see "urgent research" into the Delta Plus virus variant, which he seems to associate with rising infections in the U.K. Gottlieb: "This is not a cause for immediate concern but a reminder that we need robust systems to identify, characterize new variants. This needs to be a coordinated, global priority for COVID same as similar international efforts have become standard practice in influenza." Bloomberg
U.S. emissions
President Biden's green agenda is being threatened by coal-state Senator Joe Manchin, whose opposition to the proposed Clean Energy Performance Program has sparked a flurry of revisions just before the crucial-to-the-whole-world COP26 summit in Glasgow. Washington Post
Stagflation fears
Investors are freaking out about the prospect of stagflation, but there seems to be disagreement about how it's defined. Deutsche Bank thematic research chief Jim Reid: "My gut feeling is that while the risks are elevated, especially on the inflation side, the phrase ‘stagflation’ is being used too aggressively at the moment." Fortune
Nato vs China
Nato's objectives are shifting to reflect the U.S.'s "pivot to Asia," meaning the military alliance will be focusing more on countering China. It has spent recent decades focusing on Russia and terrorism. Nato Secretary-General Jens Stoltenberg: "Nato is an alliance of North America and Europe. But this region faces global challenges: terrorism, cyber but also the rise of China. So when it comes to strengthening our collective defense, that’s also about how to address the rise of China." Financial Times
This edition of CEO Daily was edited by David Meyer.
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