Starting off with positive news, the U.S. economy shows strong signs of recovery as the pandemic abates and confidence in the vaccines grows. On the downside, expect many parts of the economy to experience some growing pains.
For example, businesses still struggle with supply-side and labor issues. Businesses and individuals will have to choose between spending more and buying less.
Find out how these pandemic-related issues will impact businesses and the companies that fund their growth.
Potential Inflation Risks
Several pandemic-related forces may combine to drive increased inflation. For instance:
- Supply and labor problems: Some industries still struggle with supply-side issues, such as the rising cost of key inputs like lumber and semiconductors, as well as overseas shipping delays. Other companies have had a hard time attracting new workers to meet demand. Employers need to compete with government unemployment stipends and employees who have employed their time off to seek better opportunities. A tight labor market combined with higher minimum wages are also contributing factors.
- Pent-up demand for products and services: Pent-up demand for various products and services can boost revenues but also aggravate supply and labor problems in struggling markets. Until suppliers expand production and distribution, prices for scarce human and material resources will rise.
- Government stimulus programs for individuals and businesses: The government also offered multiple stimulus programs to both businesses and consumers. People with extra cash to spend generate more revenue for businesses, but the extra customers may burden unprepared businesses and even entire industries as they struggle to scale. Given so much cash (government stimulus) being pumped into the economy, consumers now have $2.1 trillion in disposable personal income (savings). This disposable income, if deployed by consumers in pre-pandemic activities, should result in increased consumer spending, as estimated by the U.S. Bureau of Economic Analysis
- End of deflation from China: With China being the hub of the world’s manufacturing for the past 30 years, China was contributing -1% to global inflation as estimated by the Fed. More recently, China’s economy has caught up to the rest of the world and is not exporting deflation like it once did.
Comparison of the Pandemic Recovery to Historical Periods
The Inflation of the 1960s
According to speculation by economists involved in the business financing industry, ongoing government stimulus may keep contributing to higher inflation rates over the next few years. As an analogy, consider the guns and butter period of the 1960s when social spending heavily competed with defense spending for a share of the government budget.
During that time in history, modest inflation of one to two percent ballooned into five or six percent within only a couple of years. Some economists suggest that the pandemic recovery period of the 2020s could mirror that time because of increased government stimulus spending.
The Roaring Stock Market of the 1920s
A contrast of the potential of the 2020s to the growth period of the 1920s, exactly a century ago, might even appear more striking. Like today, the country had emerged from a pandemic. Similar to today digital revolution, innovations like electricity, refrigeration, radio and even indoor plumbing accelerated growth and productivity. Both periods created permanent changes to the country’s population and economy resulting in an unparalleled movement of people and significant social disruption.
Also, like the 2020s, in the 1920s, economic growth fueled a soaring stock market mostly benefiting the wealthiest people, and some financial analysts expressed concerns about it being overvalued. Sadly, the 1920s ended in the Great Depression. Besides concerns about the economy, political divisions loomed over this generally prosperous time. Again, the economy definitely demonstrating signs of a strong economy. On the other hand, all stakeholders in that economy have an opportunity to study history in order to avoid repeating it.
What are Some Sectors to Watch?
Some sectors of the economy will take longer to recover. In fact, some may never experience the kind of growth they did prior to the disruption caused by the pandemic. For instance:
- Hotels: Compared to three percent before the pandemic, over 15 percent of hotel loans are delinquent now. People have slowly begun to resume traveling. Many businesses relied on video conferences to avoid in-person meetings during the pandemic, and they may continue to rely upon technology because of cost savings and convenience.
- Retail store space: Even before the pandemic, e-commerce started to take an increasingly large share of retail revenues. Once people grow accustomed to shopping online, many said they plan to continue to rely on their favorite digital outlines for convenience and the ease of comparing prices. Thus, many brick-and-mortar stores have closed. Over 10 percent of retail loans were delinquent, and some experts predict that up to half of the large anchor stores in malls will close by the end of 2021. Note that while demand for physical stores declined, overall retail sales have trended up.
- Office space: The pandemic drove many employees from their business offices to their home offices. As employees and businesses have adapted to this change, many companies have turned remote work into the new normal in many industries. While the share of long-term leases as a percentage of all leases dropped, the average length of leases has declined by 15 percent.
The Good News for Secured Lenders During the Recovery
While many end-use sectors for secured lending are in recovery mode, plenty of sectors, such as manufacturing are struggling right now to keep pace with demand. The chart for the ISM manufacturing index spiked and so have both wholesale and retail sales. Accordingly, commodity prices have rapidly increased, notably for lumber, semiconductor, base metals used in manufacturing, and other products.
As cash flows recover, current demand growth for both secured and traditional funding remains somewhat flat. However, full recovery is within reach and should pick up soon as manufacturers take advantage of financing to expand production and inventories. The saying goes ‘All change is preceded by crisis’ and today there is a huge push for lenders to adapt to innovation and technology like never before. Capstone is ready with a fresh website redesign, enhancements to informational content, a quick and convenient funding app, as well as integration of new software and social technologies. These updates will improve functionality and usability for current clients and make it easier than ever to help all business owners access the capital they need throughout their recovery.
