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Home » Blogs » Think Tank » Mama, Don't Let Your Babies Grow Up to Be Economists

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Logistics / Supply Chain Finance & Revenue Management / Supply Chain Planning & Optimization / Business Strategy Alignment / Global Supply Chain Management / Supply Chain Security & Risk Mgmt / Consumer Packaged Goods / Retail

Mama, Don't Let Your Babies Grow Up to Be Economists

February 19, 2013
Robert J. Bowman, SupplyChainBrain

The last time the San Francisco Roundtable of the Council of Supply Chain Management Professionals heard from Walter Kemmsies, he was raising the serious possibility that inflation would be running between 4 and 6 percent by the end of 2012. The respected chief economist with Moffat & Nichol often breaks from the pack when divining the U.S. economy, and this prediction was characteristically bold. Outliers score big when they hit, but can seem clueless when they miss. And Kemmsies clearly got that one wrong; as of December of 2012, the U.S. inflation rate was scraping along at 1.7 percent.

So what happened? A little thing called the fiscal cliff, that boneheaded political ploy by Congress to slash the federal budget deficit without taking responsibility for any particular cuts. The chaos that resulted from sparking an artificial crisis disrupted the usual economic cycles that would have led to the inevitable sharp rise in inflation by now. So says Kemmsies.

It's still coming, he told the San Francisco Roundtable during a recent return visit. And with it, a lot of other dangerous stuff, if the U.S. fails to get its economic house in order and start spending money on the right things.

"The biggest problem today is not how to remodel the house," Kemmsies said. "The house is burning down. We have to rebuild, but we should put out the fire first."

Aside from political posturing on Capitol Hill, the chief source of the nation's current economic woes is its "unsustainable" trade deficit. "That's where every problem we have shows up," said Kemmsies. In November 2012, it topped $48.7bn, the biggest increase in eight months, and a 15.8-percent rise over October.

Approximately 41 percent of the deficit number can be chalked up to oil imports, but even without that category, the U.S. goods deficit is two and a half times greater than the services surplus, Kemmsies noted. Bottom line: "The U.S. needs to become serious about exports."

There are three ways to achieve this goal, in his view. Eliminating number three ("take some of our assets and give it to the people who have been giving us credit - give New Jersey to China"), we're left with either importing less or exporting more. The first option isn't going to happen, notwithstanding the trend of reshoring manufacturing from China back to the U.S. That leaves us with the pressing need to boost exports.

Kemmsies has long been on record as favoring a surge in overseas sales of American agricultural goods. Promising categories include grain, oil seeds, meat and biofuels. Energy is another strong candidate; he believes the nation could become a net oil exporter by 2020. Then there are the huge reserves of natural gas that the U.S. is only beginning to tap.

None of this will happen automatically. For one thing, Kemmsies, said, the country needs to boost its productivity, to the tune of 3 percent to 3.5 percent per person over the next 10 to 12 years.

Even more important is a concerted program to repair and expand the nation's transportation infrastructure. The network as it stands is simply inadequate to sustain current volumes of commerce, let alone the huge increases that would accompany a rise in export sales. Roads, rails, bridges, rivers, ports - they're all in desperate need of attention.

Kemmsies blasted both major political parties for failing to come up with a means of funding and executing these much-needed infrastructure improvements. America should have learned a lesson from the Eisenhower era, which saw construction of the interstate highway system in the 1950s. That massive, government-aided program was a crucial factor in the economic boom that followed. "The wealth of a country," said Kemmsies, "is measured by its infrastructure."

As the U.S. population becomes more urbanized, export-oriented regions will suffer increasingly from logistics problems. Making matters worse, Kemmsies said, is the potential for severe disruption caused by natural disasters. Meanwhile, Mexico is focusing on the development of its port and rail systems, which could soon rival those of the U.S. as gateways to the growing economies of Latin America.

Now about that inflation rise. In the wake of the Great Recession, the Federal Reserve Bank sought to rescue the economy by buying up huge amounts of bad mortgages and government debt. When the Fed moves to sell some of those holdings, yields and interest rates will rise. So will wages and commodity prices, as the economy begins to heat up. And presto: inflation is back.

So says Kemmsies. Will he be right this time? Or is he the proverbial stopped clock, accurate twice a day? According to the U.S. Commerce Department, the U.S. economy actually contracted at an annual rate of 0.1 percent in the fourth quarter of 2012 - the first time that's happened since 2009. Are we really headed for recovery at last, with all of the benefits and headaches that come with it? And if we are, are we equipped to meet the challenge of growth?

It doesn't take an economist to answer that last question with a confident no. Regardless of whether you subscribe to Kemmsies' economic world view, you can't argue with his assessment of the nation's infrastructure, and the political gridlock that prevents Congress from addressing it in a meaningful way.

From an economics perspective, I think Kemmsies and all of his colleagues should be cut some slack. Considering the pace of change today, and the myriad factors that contribute to an increasingly globalized economy, I wonder whether forecasting has become, by definition, a losing game. But here's another prediction by Kemmsies that seems impossible to dispute: "We are walking," he said, "into the mother of all generational changes."

Know any young people out there who want to become economists? Perhaps you ought to sit them down for a talk.

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Keywords: supply chain, supply chain management, international trade, U.S. economy, U.S. trade deficit, balance of trade, retail supply chain, supply chain risk management

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