What are the Unexpected Consequences of the Emerging Economic Trends?
The news is full of articles about emerging trends – inflation, commodity price changes, labor shortages, supply chain problems, and cybersecurity. FMG has prepared articles dealing with each of these topics:
How to Protect Against Inflation in 2021: A Guide for Commercial Lenders
What is the trickle-down impact of these issues? What are the unexpected consequences of inflation, commodity prices changes, labor availability, supply chain concerns, and cybersecurity? And, how are the issues inter-related?
A company’s performance in 2021 and into the future will be impacted by each of these trends because the impacts are felt by the overall economy, specific industries, and specific companies. Those impacts are far reaching and sometimes unanticipated. And, the impacts can be interrelated. Let’s explore a few trickle-down impacts.
According to NASDAQ, lumber prices peaked at $1,670.50 on May 7, 2021, and have not dropped below $500.00 since. This graph shows the lumber prices from July 2016 to July 2021.
Lumber prices are obviously expected to increase constructions costs and materials, but the use of lumber is widespread throughout all areas of our economy. Consider pallets.
The graph below captures the wood pallets and pallet containers component of the Producer Price Index (“PPI”) from June of 2016 to June of 2021. Pallet prices as of December 2009 are the base level of $100. The price of wood pallets increased in Q1 and Q2 of 2021, and has shown little reduction in price even when lumber prices began dropping from the May 2021 peak.
According to Bloomberg’s research, there are 2 billion pallets in circulation in the US economy and approximately 90% are wooden.
The importance of pallet prices in multiple industries is evidenced by the inclusion of pallet prices in the PPI. Also consider the interaction of the combination of commodity prices changes and inflation on businesses that use pallets. Evaluate the impact pallet pricing has on farm necessities such as fertilizer, fuel and tractor parts. Consider harvested crops such as tomatoes and other bulk produce. How and when will this impact food prices for consumers, restaurants, and other food service providers?
According to salary.com, as of June 28, 2021 the average hourly rate for a general laborer ranges between $12 per hour and $22 per hour with 50% of the general laborers earning $16 per hour. The difference between the low and high hourly rates compared to the median hourly rate is 63%. This wide range of hourly rates has a material impact on the profitability of a company, depending on where a business is located and what the hourly rates need to be to attract workers.
The average hourly rate for an entry level financial accountant ranges between $22 per hour and $32 per hour, with a median hourly rate of $27 per hour. The difference between the low and high hourly rates compared to the median hourly rate is 37%. The wage range is less dramatic than the range for the general laborer.
These are interesting dynamics. Layering this information against cost of living by city, the work from home or remote work evolution, and availability of labor by skill set further complicates the cost structure a business will be dealing with as it attempts to create the most likely forecast of future labor costs.
These dynamics have already impacted and will continue to impact, housing costs in rural areas. Families moving to new areas will alter the available labor pool by more than that of the primary wage earner – both where they move from and where they move to. Real estate prices are impacted by people moving to lower cost areas with equity from the sale of their existing home in the pockets.
The economy is moving to a new normal at an accelerated rate. The impact of the emerging trends identified in this article will continue and will be further enhanced by additional new emerging trends. Companies, and their lenders and owners and other stakeholders, will need to be anticipating the changes and the impact on the cost structure of the business. Anticipating trickle down impacts and unexpected consequences are key to survival and growth.