Pent-Up Demand and a Roaring Twenties Redux

Euphoric State

In ’21, we see an economic recovery unlike never before. Of course, I am referring to 1921, after both WWI and the Spanish flu had ended. But the country’s mood now, as vaccines work to end this pandemic, is beginning to rise toward a euphoric state.

This, combined with tremendous government stimulus efforts, has caused the demand for goods to skyrocket. The GDP forecasts for 2021 continue to move higher. FTR forecasts 2021 GDP growth at 6.1%. In the latest Wall Street Journal survey of economists, the range is from 2.4 – 10.0%, with the average at 6.0%.

Sling-Shot Effect

The economic shutdown in March-May 2020 created enormous pent-up demand in the economy. It produced a “sling-shot effect”, where commercial activity was held back and then propelled forward rapidly. Therefore, substantial pent-up demand built up during the economic lockdown and was unleashed in the restart.

The ISM (Institute of Supply Management) Indexes, which are forward-looking, confirm there is robust demand present now and in the foreseeable future. The March Manufacturing PMI spiked almost four percentage points to 64.7, the highest reading in 37 years! IHS Markit’s Index placed it at the second-highest reading ever. Likewise, the Services PMI jumped over eight percentage points, to 63.7, an all-time high.

No Pent-Up Supply

However, there was no pent-up supply, rather the opposite, in fact. Factories shut down, during well, the shutdown. Unfortunately, the restarts in many industries have been difficult. Manufacturers had to install COVID safety protocols. Workers have been reluctant to return to jobs either based on personal health concerns or generous government assistance. The global supply chain was also impacted, resulting in huge backlogs at the ports. Throw in February’s polar vortex, and you get an unprecedented widespread shortage of components, parts, and industrial output.

The result is surging demand combined with pent-up demand, matched up against constricted supply. Of course, this creates more pent-up demand since manufacturing has still not caught up in the short term. Pent-up demand clouds the economic forecast because it is difficult to measure and determine how long it will take to catch up. However, the ISM numbers show it is massive and growing.

Class 8 Trucks Running Behind

For an estimate of overall manufacturing pent-up demand, it appears that the current supply of Class 8 trucks is running about 20% behind demand. Truck manufacturing is being impacted by the shortage of semiconductors, but many industries are not. Therefore, let’s estimate the total pent-up demand in all manufacturing at 15%. Meaning the supply is running 15% below total demand. Combine this with the enormous pent-up demand in the service industries due to the pandemic, and the economy is set up to surge in the next 12 months.

When there is another pandemic, perhaps world governments should expand the definition of essential workers to include those industries that should not be shut down because their products are essential to a restart. They could receive government loans to build inventory and quickly repay the loans when the inventory sells.

If you never understood what the Roaring Twenties were, you are about to get a very personal history lesson. But whenever I make that statement, the comment I always hear is: Yes, but remember what followed the Roaring Twenties.

Well, advancements in medicine and technology have enabled us to significantly limit the fatalities from COVID-19 versus the Spanish flu, on a population percentage basis. Let’s hope our knowledge in the field of economics has made similar advancements.