Importing Constraints: Durable Goods Inflation In Context

Since the beginning of the pandemic recovery, we have seen some significant inflation within durable goods. While this seems to make a kind of simple, apparent sense – during the pandemic, Americans stuck at home upgraded their household goods – it is still historically strange. For much of the last quarter century, the price index for durable goods declined steadily as globalization and foreign economic development steadily lowered unit costs for manufactured goods. So why are durable goods prices spiking more sharply than overall prices today?

The explanations that have become standard – that (1) fiscal transfers gave Americans more purchasing power than the economy could handle and that (2) that Americans are “unwilling to work.” But neither explain the heart of the historic inflationary surge in the chart below.

A better explanation comes from taking seriously the consequences of globalized trade. A recent paper by Justin Bloesch and Jacob Weber helpfully points out that the domestic labor content of consumer durables and capital goods has steadily fallen over the same timeline, such that most of the value associated with the durable goods you and I purchase derives from foreign labor, and not domestic labor.

The story here is familiar: as information and transportation technology improved, manufacturing firms looked to site facilities in countries with lower wages, which would allow them to export finished goods back to the home market at lower prices or higher profit, whichever the market dictated. However, this has meant two important things in the context of the pandemic.

First, since the factories capable of producing capital-intensive manufactured consumer durables are sited abroad, the ability to sell those durable goods domestically relies on its own physical capital stock: shipping vessels, container chassis, and general port infrastructure. Especially in light of the additional delays imposed by varying pandemic policies and port quarantines, the usual network benefits to overseas trades have aggravated costs and throughput challenges. If logistics and transportation become expensive – as they did over the pandemic – availability of domestic inventory of imported goods are more likely to be rationed using a price mechanism.

Second, after 25 years of offshoring and underinvestment, the US largely lacks the physical capacity to smoothly switch from a foreign manufacturing capital stock to a domestic one. This is to say, even if we assume that every manufacturing job opening were filled today from the domestic working age population, there is not enough of the right kinds of plant and equipment to translate domestic labor into the requisite kinds of production. The labor force that matters for durable goods production – and for the production of intermediate goods required for final durable goods – simply does not live here.

So, is this evidence of a labor shortage? If it is, it’s evidence of a shortage of workers in industries related to the movement of, rather than the production of, consumer durable goods. Yet employment in Transportation and Warehousing employment is actually well-above its pre-pandemic trend and is continuing to make new highs.

If durable goods inflation reflected merely the dearth of labor in trucking or warehouses, the rise in employment would be net disinflationary. Yet durable goods inflation continued to run hot even as hiring in these sectors continued.

If recent inflation in durable goods is due to a generalized shortage of anything, it is not domestic labor. Instead, decades of underinvestment have left the US unable to cleanly substitute domestic labor for foreign labor and foreign physical capacity when demand ramps up–due to the lack of requisite domestic physical capacity. Durable goods inflation is, in a sense, a lack of spare foreign physical capacity and, where COVID-19 outbreaks emerged, foreign labor as well.

The reported shortages of microchips, electronic components, and electric components has much more to do with the challenges existing within Asian supply chains; that is where the bulk of production takes place. A Covid-19 outbreak in Malaysia last year affected microchip packaging facilities and prolonged the shortages holding back US auto production. Likewise, China’s Olympic Blue, and  Covid Zero policies are part of the more proximate set of causes for the inflation we see than the level of domestic fiscal and monetary support.

Given how prominent these dynamics are, the United States would likely have seen similar inflationary pressures for durable goods even in a counterfactual world where no one reported “labor shortages” in the US. If we are trying to describe the nature of the real constraints that the economy has been facing over the past 6-12 months, we need a richer economic vocabulary than one that reduces every inflationary constraint to a domestic labor constraint.