Amid the Euphoria, a Headwind for the Economy

by Greg Valliere, AGF Management Ltd.

THIS WEEK’S EUPHORIA — thanks to surging corporate profits, the exceptionally accommodative Federal Reserve, and lavish government spending — makes us wonder what might go wrong.

THERE ARE PLENTY OF THINGS TO WORRY ABOUT: The prospect of complicated new tax hikes, perhaps prompting investors to sell assets; the clear signs of inflation, which may or may not subside by fall; and what we call the “shortage economy,” affecting everything from gasoline prices to the lack of labor.

BUT THE GREATEST HEADWIND OF ALL may be the crisis in the semiconductor chip industry, where a lack of supply has affected not just the U.S. auto industry but also many tech companies. There’s no quick fix in sight from Washington.

SEVERAL MAJOR COMPANIES — including Apple and Samsung — stated in their earnings reports this week that the shortage will reduce their growth this summer. Apple said on Wednesday that a lack of chips is hampering production of iPads and Mac computers, potentially reducing its earnings in the second quarter by $3 billion to $4 billion.

THE AUTO SECTOR ALREADY HAS SHUT DOWN PRODUCTION, with Ford saying it expects to produce 1.1 million fewer vehicles this year because it cannot get enough chips. Ford expects to lose about half of its anticipated second-quarter production. Volkswagen said it will suspend production of Jettas and Tiguan SUVs in Mexico next month because of the chip shortage.

PART OF THE PROBLEM IS RISING DEMAND, but production has decreased after the winter freeze in Texas, fires in two Japanese production facilities, and a severe drought in Taiwan, where production depends on ample sources of water.

OFFICIALS IN THE BIDEN ADMINISTRATION are aware of the shortage and its implications and have called for $50 billion in federal funding to incentivize more domestic chip production, but it would take a couple of years for this to boost production. Many affected firms worry that the problem could get worse before it gets better.

WITH THE ECONOMY ON MONETARY AND FISCAL STEROIDS, the semiconductor shortage won’t crush overall growth, but it may reinforce a public view that shortages will persist. Watch gasoline prices — they affect consumer attitudes, perhaps more than any other factor — and like so many other commodities, prices are surging.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

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This post was first published at the AGF Perspectives Blog.