It’s official. The word “transitory” has been eliminated from the English language.
Just joking, obviously. But it has been removed from the official Federal Reserve description of inflation, confirmation that rising prices are going to be with us for a while.
That got us thinking. When it comes to the Main Street economy these days, what changes are no longer transitory, but permanent? Here are three ways to answer that question.
- Financial Independence
Main Street and Wall Street both received a lot of financial aid from the government over the last few years. The 2017 tax cut and 2020-2021 federal pandemic relief alone delivered more than $7 trillion to people and businesses, the biggest injection of federal stimulus in any five-year period in U.S. history relative to GDP.
It wasn’t just the extra pocket money and tax cuts. The Fed also kept borrowing costs at rock-bottom lows.
Before the pandemic, it was easy for the Fed to keep short-term borrowing cheap because inflation was so low. During the pandemic, the central bank lowered short-term rates even further, and bought government debt to push down longer-term rates.
That contributed to a surge in demand (good for the economy), but at a time when global supply was reeling from production and transportation bottlenecks (bad for the economy).
Now inflation is well above the Fed’s 2% comfort zone, rocketing up to 6.8% from a year ago in November. The Fed isn’t expected to raise rates soon, but the clock is ticking louder.
The upshot: Main Street won’t be able to rely on ultra-cheap money and easy credit any longer.
Small businesses had to transform to survive change. They digitized, invested in technology, and updated operations. But businesses aren’t the only ones innovating. Workers, too, are reinventing themselves. Over the past year, we saw record numbers of people quitting, new businesses being established, and an increase in self-employed workers.
The pandemic was a kick in the pants that drove a lot of change, but innovation can’t be a pandemic one-and-done. After a surge in productivity early in the pandemic due in part to technology investments, productivity fell in the third quarter by more than 5% from the same time a year ago, according to the Bureau of Labor Statistics.
Not only did Main street produce less per hour worked, the cost of a unit of output increased 10% from the previous year. And workers weren’t the main beneficiaries of those higher costs. Hourly wages grew not by 10%, but just 3.8% over the same period.
Shortages likely were the biggest culprit behind the higher cost of production.
The upshot: The economy will require continuous innovation to keep up with higher production costs post pandemic.
Main Street Macro is all about hyper-local communities, but the pandemic was a huge reminder of the global connections of people and business.
Employers felt the strain of the pandemic in ways that few might have anticipated. Companies of all sizes struggled against shipping challenges and material shortages.
Like low inflation, a low-cost and efficient supply chain once was taken for granted. Before the pandemic it was common to run a lean-and-mean, on-demand supply chain strategy.
To keep costs low, companies would hold just enough inventory to meet current demand. They frequently sourced material and other inputs from a single supplier or region of the world for the same reason – to keep costs low.
The pandemic exposed the risk of this practice, and the tradeoff between cost and risk is now magnified. Companies need a dependable way to increase – and decrease – production and inventory when needed. Even as the pandemic recedes, new environmental or political threats could emerge that challenge global distribution.
The solution is diversification. Not putting all your eggs into a single supplier’s basket probably increases costs in the short run. But it can fortify your business from disruptive global shocks.
The upshot: Going forward, the local diner and the megafirm alike will pay more attention to global events and look for ways to be resilient when challenged by them.
Like the word “transitory”, Main Street needs to discard another overworked catchphrase: “the new normal”.
No matter the size of the firm or occupation of the worker, the past few years have been transformative. We’re more independent, innovative, and global than ever.
Economic change is constant and faster than ever, too. Main Street will need to keep up.