By Francesco Renna and Patrick Coate
Posted Date: December 13, 2021
The ongoing recovery from the COVID-19 recession is demonstrating how fragile the global supply chain can be. Shortages of components and materials are driving up prices and limiting availability of intermediate goods to producers and final goods to consumers. Producers unable to source necessary supplies and inputs are forced to pause production and lay off workers. Microchip shortages affecting the auto industry temporarily shut down some production lines and furloughed workers.Out of Chips, Out of Work: Auto Workers Tell Their Stories, FierceElectronics, June 18, 2021.
Besides material shortages, bottlenecks in global and domestic logistics are resulting in delayed deliveries, further contributing to production slowdowns and reduced hours of work. One logistics bottleneck is a shortage of cargo containers to move goods across continents; another is a shortage of workers. Congestion at major shipping ports across the United States is partly due to a surge in traffic but compounded by a shortage of dockworkers and truckers to off-load container ships.The Supply-Chain Crisis Is Creating a Rare Opportunity for Truck Drivers,The New York Times, November 18, 2021. Logistic snarls increase the lead time for order delivery. The October reading of the Institute for Supply Management’s (ISM) Supplier Delivery Index, a metric based on the percentage of firms reporting delivery delays, is 75.6, whereas pre-pandemic readings hovered around 50.Report on Business, Institute for Supply Management, October 2021.
Material shortages and logistics bottlenecks are pervasive throughout the US economy, but they are also diverse and idiosyncratic across regions and sectors. This report focuses on construction and manufacturing as examples. Both sectors have been strongly impacted by supply disruptions, and their experiences illustrate commonalities and differences in how supply disruptions affect production and employment in the US economy more broadly.
Overall, the construction and manufacturing sectors represent about 16% of US private employment, and the associated industry groups represent about 40% of workers compensation premium in NCCI states.The employment share represents workers in the Construction and Manufacturing sectors as reported by the Bureau of Labor Statistics’ Current Employment Statistics. The workers compensation premium share represents premium from the Contracting and Manufacturing industry groups, using countrywide data from NCCI’s Statistical Plan. While NAICS sector definitions are not directly comparable to NCCI industry groups, there is significant overlap between these two groups. We address these questions:
What do supply disruptions look like in construction and manufacturing?
Construction. While residential and nonresidential construction spending fell sharply in the second quarter of 2020, their recovery paths have been very different. Spending on residential construction rebounded quickly in the third quarter of 2020 and is now 27% above February 2020 levels. In contrast, nonresidential construction spending is still 8% below its pre-pandemic level, in large part due to reduced demand for office space and hotel lodging.
As many homeowners embarked on renovation projects during the pandemic, demand for framing lumber rose while lumber mills remained idle. In addition, massive wildfires simultaneously increased the demand for reconstruction and reduced lumber resources.According to the Oregon Forest and Industry Council, 15 billion board-feet of timber were lost in 2020 due to wildfires, enough to build 1 million homes. Why Is There a Lumber Shortage in the U.S.?, Capital Press, January 12, 2021. Overall, lumber shortages have been more severe in Western states than Eastern states.
The construction industry also faces additional shortages which have led to sharp increases in the price of steel joists, asphalt, PVC products, and copper pipe.Building Materials Prices: Large Increases Year-to-Date, NAHB, September 9, 2021. Some contractors report waiting six to eight months for materials that would have been delivered in one month before the pandemic.Builders Hunt for Alternatives to Materials in Short Supply, The Wall Street Journal, October 6, 2021. The construction sector also faces labor shortages, especially in skilled specializations—an issue we highlighted in a previous special report.Is There a Labor Shortage? NCCI Economics Special Report, August 11, 2021. Supply chain problems forced many contractors to cancel or postpone projects throughout 2021. As the chart below shows, project delays among small-size construction firms are strongly correlated with supply shortages.Using data from the US Census Bureau’s Small Business Pulse Survey, we estimated a correlation of 87% between reporting a limitation in operation capacity due to bottlenecks and a reduction in employment for small-size construction firms. Construction is especially dominated by small businesses. In 2018, 94% of all construction workers were employed in establishments with fewer than 500 workers.43.5 Percent of Manufacturing Workers in Establishments with 250 or More Workers in March 2018. Bureau of Labor Statistics, The Economics Daily, June 6, 2019.
Manufacturing. Like construction, certain manufacturing subsectors are also heavily affected by input shortages. Demand is outpacing supply for metals, plastics, and microchips, impacting the production of electronics, appliances, and especially motor vehicles. Toyota, Nissan, GM, Ford, and Stellantis each halted some production lines in 2021 due to the semiconductor shortage.Here’s How Semiconductor Chip Shortage Has Impacted Every U.S. Automaker So Far, Newsweek, September 23, 2021; Toyota Production Affected by Supply Chain Issues, COVID, Daily Journal, August 19, 2021. In September, Wards Intelligence revised its initial estimates for North America 2021 auto production downward by two million units due to the microchip shortage.Supply-Chain Disruptions Continue Clobbering Short-Term North America Production Outlook, Wards Intelligence, September 21, 2021.
For food and beverage manufacturers, key shortages relate to both labor and materials. Meatpacking plants are operating below capacity because of a short supply of workers, both in overall labor and in skilled positions.Tyson Says Labor Shortage Hits Poultry, Lifts Sales View on Beef, Bloomberg, May 10, 2021. A shortage of materials such as plastic bottles and foam packaging is also making it difficult for producers to package their products.Material Shortages in the Packaging Industry: Is There an End in Sight?, Prairie State Group, September 8, 2021. Mintec’s Global Packaging Index for October 2021 is up 67% from a year ago. Shortages in the food and beverage industry are quickly translating into higher prices for consumers. The Consumer Price Indexes for beef, chicken, and pork were up 20.9%, 9.2%, and 16.8% respectively in November from a year ago.
Supply chain bottlenecks are hitting manufacturing businesses regardless of their size. Using responses from the Small Business Pulse Survey, we find that supply chain bottlenecks hit small manufacturing firms harder than small non-manufacturing businesses. The percentage of small manufacturing firms operating below capacity due to lack of availability of supplies and inputs was twice as high as the national average during 2021. Almost 70% of firms experienced delays from domestic suppliers and one in three small manufacturing firms faced delays from foreign suppliers. According to ISM, manufacturers are now waiting an average of 92 days to receive their orders.‘It’s Not Sustainable’: What America’s Port Crisis Looks Like Up Close, The New York Times, October 10, 2021. That is four weeks longer than a year ago.
How long are supply disruptions likely to persist?
Some of the bottlenecks in construction are already starting to ease. Following a ramp-up in production, lumber traded around $550 per thousand board feet in October 2021, down from $1,515 in May.Here We Go Again: Lumber Prices Shoot Up 40%, Fortune, October 21, 2021. The drop in lumber prices stopped but did not reverse price growth for construction materials due to new shortages such as plastics and steel. The Producer Price Index for goods used as inputs to residential construction was up 18.6% year-over-year in October but has been essentially unchanged since last June.
Shortages of plastics may ease soon. While plastic materials and resins production for 2021 is projected to decrease by approximately 3%, the Plastics Industry Association forecasts production to increase by 9.2% in 2022.Report Forecasts Robust Growth for Plastics Industry, Plastics Today, July 21, 2021 This boost in production will benefit both construction and auto manufacturing because plastics are widely used in both sectors.
For microcontrollers, the type of chips used by automakers, the outlook is less optimistic. Although TSM, Samsung, and Intel have committed to boost chip production capability over the course of the next three years, the semiconductor shortage is expected to remain critical throughout 2022.Intel to Invest Up to $95 Billion in European Chip-Making Amid U.S. Expansion, The Wall Street Journal, September 7, 2021. Until this shortage is resolved, motor vehicle production will be subject to microchip availability and more furloughs are possible.
It will take some time before the supply of steel catches up to increased demand. In North America alone, demand for finished steel is projected to be up 13.7% for 2021 and grow another 5.4% in 2022.World Steel Association Short Range Outlook, October 2021. In response, many producers are planning to ramp up production. However, major American steelmakers are not restarting production in some older plants where production was suspended at the beginning of the pandemic. U.S. Steel is instead building new, more energy-efficient plants. New steel production from these facilities will not hit the market before they become operational in 2024.U.S. Steel Plans New U.S. Mill as Prices Surge, The Wall Street Journal, September 16, 2021. Steelmakers Keep Old Plants Idle Despite Surging Prices,The Wall Street Journal, June 10, 2021.
Meanwhile, existing steel mills in the United States are producing at high capacity, with little space to boost production even more. The capacity utilization index for iron and steel products was above 85% in October 2021, the highest since the Great Recession. Thus, the steel shortage will remain a critical issue for auto manufacturing and residential construction.
Labor shortages in transportation are an important contributor to supply chain disruptions. The ports of Los Angeles and Long Beach recently announced that they will extend their hours of operation, but it may take months to hire enough workers for the facilities to operate 24/7.Biden Will Announce Expanded Operations at Port of Los Angeles as Supply Chain Crunch Continues, Los Angeles Times, October 13, 2021. Adding a third shift or extending operation to weekends would only partially attenuate the logistics problem unless the shortage of long-haul truck drivers is also resolved. The trucking industry was already facing a problem of an aging workforce before COVID-19. An additional one million drivers may be needed over the next nine years to replace retirees and meet projected demand increases.A Shortage of 80,000 Truck Drivers Is Wreaking Havoc on the Supply Chain—and It’s About to Get Worse, Fortune, October 28, 2021. Long lead times for order delivery will persist, and may worsen, if the trucking industry cannot attract new workers.
Employment scenarios for residential construction and auto manufacturing
How much do these shortages affect employment in the afflicted industries, and what level of employment might we see in 2022 as some shortages ameliorate while others persist? In this section, we present potential employment paths for alternative recovery scenarios from the last quarter of 2021 to the end of 2022 in residential construction and auto manufacturing. We choose these subsectors because they are hard-hit by supply chain disruptions and employ a significant number of workers. Employment in residential building construction surpassed employment in nonresidential building construction during the pandemic, and employment in auto manufacturing represented about 8% of total manufacturing employment in the year before the pandemic.
Residential Construction. New housing starts and employment in residential construction were growing along a linear trend before the pandemic.For the period from 2013 to 2019, the correlation between housing starts and residential construction employment was 91%. After the initial decline caused by the COVID recession, housing starts rebounded faster than employment. Low mortgage rates boosted the demand for housing during the economic recovery, and the number of housing starts quickly rose above its pre-pandemic trendline. Housing starts have stayed above trend despite a slight decline in the last few months. Employment also rebounded quickly in late 2020 from its initial COVID dip but not to the same degree. Residential construction employment remains 2% below its pre-pandemic trend as of the third quarter of 2021.Note that this estimate matches the employment gap for construction illustrated in our Economic Outlook for Q3 2021 Quarterly Economics Briefing, NCCI, October 27, 2021.
Our scenarios for residential construction are based on two key observations:
In all scenarios, housing starts are above the pre-pandemic trendline throughout 2022, but employment is slower to catch up. Only in the upside scenario does employment reach above its pre-pandemic trendline in 2022. In the baseline scenario, persistent labor shortages hold back employment recovery even as residential construction activity stays strong. Even more than material and logistics constraints, labor shortages are likely to be the biggest future challenge for the residential construction industry, which by one estimate needs to hire a staggering 61,000 new workers per month over the next three years to keep up with demand.Construction Worker Shortage Has Reached “Crisis” Levels, Housing Wire, November 4, 2021.
Auto Manufacturing. Auto manufacturing took a double hit during the pandemic. Production and employment plunged at the pandemic’s onset in the spring of 2020 but quickly ramped up to slightly above pre-pandemic levels in the second half of the year as manufacturers attempted to make up for lost time. Production fell again starting in early 2021, this time due to the semiconductor shortage. By September, US motor vehicles and parts production was about 15% lower than a year earlier in 2020. This contraction did not affect all lines of production equally. Automakers cut production of low-margin vehicles, such as entry-level cars, more than light trucks and SUVs. For 2021 through October, auto assemblies were 38% lower than in the same months of 2019, but light truck assemblies were down only 10%.
Production pauses and temporary layoffs in 2021 caused by the microchip shortage affected total work hours more than employment headcount. For this reason, the relationship between production and employment in the auto industry is best understood by looking at the number of full-time equivalent (FTE) workers. Before the pandemic, the two measures were closely aligned. But following the initial production shutdown in the second quarter of 2020, FTE employment did not rebound as quickly as output for the remainder of that year.
Production and FTE employment have begun to reconverge in 2021. Even so, with motor vehicle production still down, FTE employment in the sector will not be able to return to its pre-pandemic level until material shortages are resolved. Most observers expect motor vehicle production to recover slowly in 2022. An October forecast from IHS Markit estimated that 2022 North American auto and light vehicle production will be 15.2 million, up from an estimated 13 million for the full year 2021. However, a few months ago, Markit’s 2022 forecast was 17 million. The downward revision reflects a more pessimistic view of input shortages, particularly microchips.
The following scenarios for auto manufacturing employment are based on alternative motor vehicle production outlooks using the pre-pandemic relationship between production and full-time employment.
In the moderate growth scenario, motor vehicles and parts production remains flat in the last quarter of 2021. The microchip shortage starts to subside in 2022 and average quarterly production is 6% higher than in 2021. FTE employment grows steadily in 2022; before year end, it reaches the same level as in the last quarter of 2019.
In the no growth scenario, the microchip shortage does not improve. Motor vehicles and parts production remains low in the last quarter of 2021 and throughout 2022. FTE employment at the end of 2022 is still about 10% below its level in the last quarter of 2019.
In the rapid growth scenario, motor vehicles and parts production starts increasing in the last quarter of 2021 and accelerates in the second quarter of 2022 from a boost in microchip production or because automakers manage to reduce their microchip dependence by removing some accessories from their models.There is already some evidence of this behavior. See, for example, Chip Shortage Forces Carmakers to Leave Out Some High-End Features, Bloomberg, May 6, 2021. Average quarterly production in 2022 is almost 10% higher than in 2021 and FTE employment returns to its pre-pandemic level in the second quarter of 2022.
The differences in our scenario employment paths for auto manufacturing are mainly driven by different potential resolutions of supply shortages, especially for microchips. This view contrasts with our construction scenarios, in which both material and labor shortages play a role, but it aligns with the views of other observers of the auto industry. Aggregated forecasts of auto production from the Alliance for Automotive Innovation all cite chip availability and other supply chain issues as the primary reason for a slow production recovery.“Reading the Meter,” Alliance for Automotive Innovation, November 24, 2021.
Forecasters expect manufacturers to make up for lower 2020 and 2021 production as soon as they can. The IHS Markit revision cited above reduced 2022 production expectations from 17 million to 15 million—but 2023 production is forecast to be 17 million. The question is not whether production will rise (with FTE employment following), but how quickly the supply chain can support production increases.
Bottlenecks, employment, and wages: a tale of two sectors
Residential Construction. In residential construction, supply chain bottlenecks are slowing down completion timelines but not the volume of housing starts.New homes completion schedules are running one month longer than before the pandemic.Why Supply Chain Bottlenecks Are Keeping Home Prices Sky High, Realtor.com, October 27, 2021. Given strong residential construction demand, below-trend employment is the consequence of both materials shortages and labor shortages. Builders are struggling to find skilled workers and are offering higher wages to entice new workers. Wages for production and nonsupervisory workers in residential building construction have increased at an annualized rate of 8% in 2021. In the three years preceding the pandemic, wages for production and nonsupervisory workers in residential building construction grew by only 4.4% annually. For employment in residential construction to return to its pre-pandemic trend, both material and labor shortages need to be resolved. We expect that wages in the sector will continue to rise. Increased employment and higher wages will increase residential construction payroll and workers compensation premium.
Auto Manufacturing. In contrast, supply chain bottlenecks and materials shortages in auto manufacturing are causing production interruptions and decreased labor demand. The drop in labor demand for autoworkers resulted in furloughs and downward pressure on wages. Average wages for production and nonsupervisory employees have increased at an annualized rate of only 2.8% since the pandemic’s onset, compared to an average annual rate of 4% in the three years before the pandemic.
Moderate forecasted increases auto production in 2022 are not likely to put much upward pressure on wages because so much of the pandemic-related decline in work hours has come from temporary shutdowns or cutbacks. Short-term FTE employment growth in auto manufacturing will come primarily from running plants at full capacity and restoring working hours of current employees to pre-pandemic levels. However, IHS’s long-term forecasts point to a surge in production in 2023 and 2024. If this forecast is realized, then auto manufacturing may face an increasingly severe shortage of skilled labor and accelerated wage growth.