Commercial Factor Q&A: John Manzella Examines the Economic Trends of 2022

As a preview for his upcoming presentation at the International Factoring Association’s annual conference, economic expert John Manzella spoke with Commercial Factor about the changing dynamics of the global economy. 

Trying to make heads or tails of the economic headwinds swirling through the United States and across the globe right now is nearly impossible. With supply chain disruption, labor shortages, inflation and many other factors shifting the ground beneath businesses, uncertainty will likely remain the norm for the next year at least.

To help factors understand and navigate the factors influencing the economy, the International Factoring Association invited John Manzella, a speaker, author and nationally syndicated columnist with expertise in global business, trade policy, labor and the latest economic trends, to speak at its annual conference in Boston this May. You can find more information and register for the event here, but in preparation for his presentation at the conference, Commercial Factor caught up with Manzella for an exclusive Q&A.

How do you expect the COVID-19 pandemic to continue impacting economic growth in the United States and globally in 2022?

John Manzella: As a result of COVID-19, many Americans reduced visits to their favorite restaurants and vacation destinations. Instead, many spent much more time at home, shelling out less for services and more for goods. For example, I have several friends who purchased new stoves and kitchen accessories since they were cooking more often, as well as new big screen TVs and furniture since they were watching a lot more Netflix. Overall, consumer demand for many products spiked, putting greater pressure on already distressed supply chains. As time continues, I suspect we will deal more effectively with the pandemic and new variants, but even so, I believe we can expect more of the same in 2022.

How has the pandemic changed how we view and evaluate risk?

Manzella: As a result of COVID-19 pandemic, companies are putting an emphasis on risk reduction over efficiency gains. For example, instead of sourcing goods from a few suppliers in a few countries, they are sourcing goods from a larger number of suppliers in more countries. This reduces the risks if the COVID-19 pandemic continues to get worse or another pandemic strikes, although buying in smaller scale from a larger number of suppliers drives up costs.

American firms also are increasing warehousing space while stockpiling more supplies in varied locations, both in the United States and abroad, which create additional factors boosting costs.

Overall, companies are no longer utilizing just-in-time inventory strategies, which have often turned into just-too-late failures.

How have international trade dynamics and the evolution of globalization created new supply chain and investment risks? How are companies adapting to these changes and how should they adapt?

Manzella: Over the last several years, globalization has been adapting to many factors, including an increase in Chinese costs and shifting trade trends primarily due to U.S.-China tensions.

For several years, U.S. import prices from China, as well as costs associated with offshoring there, have been rising for a variety of reasons. For one, China has a serious worker shortage due to its 1980 one-child policy, and although this policy has been terminated, the damage is done. China's workforce is predicted to contract by 20% by 2050, and in order to attract workers from this shrinking labor pool, Chinese wages rose by 170% from 2010 to 2020.

In addition, the trade war begun under the Trump administration has added U.S. tariffs on Chinese imports, driving up costs to American consumers. Plus, as U.S. supply chains diversify away from China to minimize risks should U.S.-China trade tensions worsen and toward other Asian countries like Vietnam, other problems are playing a role. Some of these countries have small working populations and less developed infrastructure, meaning their quality and output can’t match China’s.  As a result, one of the major benefits historically provided by globalization — the seemingly endless supply of inexpensive products — will soon come to an end.

In the future, if India, South America or Africa become efficient low-cost manufacturing locations, it's possible we’ll see a new supply of inexpensive products for global consumers, but I don’t anticipate that happening anytime soon.

How has globalization specifically influenced inflation?

Manzella: Over the last several decades, China has been a primary exporter of inexpensive products like clothes, toys, furniture and electronics to the United States. This, combined with lower costs derived from offshoring, has enabled American consumers to buy much more with less, stretching the dollar in a way that has subsidized the standard of living of middle and lower-income Americans. This has undoubtedly put downward pressure on inflation. But as I noted earlier, this seemingly endless supply of inexpensive products will soon come to an end. In turn, as the cost of goods for millions of Americans rise, we can expect long-term inflation to follow.

What are some of the new and emerging drivers of economic growth in the current environment and how are they shaping the future of the global economy?

Manzella: The impact of new American drivers of growth, including nano technology, biotechnology, 3D printing, green industries, energy storage and, especially, artificial intelligence, are just being felt. As these drivers of growth kick in to a greater degree, they will push American gross domestic product up for years to come.

Digital technologies and automation are transforming globalization and having a large impact on both companies and workers. For example, automation has not only reduced incentives to seek cheap labor, which has typically involved establishing large scale manufacturing operations in low-cost countries, but made it more prudent to develop smaller, digitally connected smart facilities located near fast-growing consumer centers across the globe. However, although automation has a tremendous future, keep in mind that it is still in its infancy and not yet able to take over many processes currently performed by employees.

How are factors like the energy revolution and shifting demographics shaping the future for the global economy?

Manzella: Advances in horizontal drilling and hydraulic fracturing have enabled U.S. oil production to exceed that of Russia and Saudi Arabia for the first time in 2018. This has made the United States less dependent on the Middle East, and perhaps less interested in it. On the other hand, because approximately 70% of Chinese energy demand is imported, China’s interests and influence in the Middle East is likely to increase. This has significant geopolitical implications.

What are you seeing when it comes to changes in labor supply and demand and what is behind this trend? How do you expect this to develop in 2022 and beyond?

Manzella: There are many reasons why the American worker shortage is significant and will worsen. For one, prior to the pandemic, each day 10,000 baby boomers reached the retirement age of 65 and left the workforce. The pandemic has accelerated this, pushing more people to retire early.

In addition, many people between the ages of 25 and 44 are still out of the workforce. It's possible many have not returned due to childcare issues or because they have decided life is to short and prefer not to return to work — at least for now — due to the pandemic. Another reason is that approximately one in five men ages 25 to 54 are long-term unemployed. Many are incarcerated or on disability or welfare programs and are not expected to enter the workforce anytime soon.

Due to these reasons and others, U.S. worker participation rates have continued to fall and are projected to do so well into the future.

How do you think what you’ve labeled as the “deterioration of the middle class” is affecting the U.S. economic and political landscape?

Manzella: I believe American free market capitalism is the greatest system ever devised. It has generated the world’s greatest economic growth, lifted millions out of poverty and achieved the highest standards of living. But for many, their economic condition is less than optimal.

The American middle class has been eroding since the 1970s and income inequality is greater in the U.S. than other advanced economies while 44% of all U.S. workers ages 18 to 64 — 53 million people — hold low-wage jobs with median hourly wages of $10.22.

Based on Pew Research polling, most Americans believe the economy is helping the rich while hurting the middle class and poor. And according to Gallup, surveys of 18- to 39-year-olds show that support for capitalism has decreased while support for socialism has increased.

Some of America’s biggest beneficiaries of capitalism have begun to recommend solutions to ensure we don’t kill the goose that lays the golden egg. We need to keep in mind that if we are not able to rebuild the middle class, the political pendulum could swing far left.

For factoring companies and other specialty finance companies, what should be top of mind in relation to these topics? How can they put themselves in a position to succeed?

Manzella: It's essential that we retain an environment that encourages entrepreneurs to take risks. When they do this, they create companies, jobs and new innovations, leading to greater economic growth and higher standards of living.

An essential key to future U.S. economic growth and job creation lies in our ability to innovate new products and services and deliver them to the world’s consumers. To do so, Americans need to champion — and not fear — globalization as it continues to evolve.

In the years ahead, U.S. companies need to be agile, cautious and engaged internationally. And very importantly, they should heed the words of Charles Darwin, who said it’s not the strongest or the most intelligent of the species that survives; it’s the one that is most adaptable to change.