By Christine Smith, Public Affairs Staff
First, it was face masks and hand sanitizer.
Ebay banned listings of masks, sanitizer and disinfecting wipes after price run-ups—for example, $138 for a bottle of Purell. Amazon cracked down on third-party sellers for price gouging, leaving one vendor stockpiling over 17,000 bottles of sanitizer. The French government decided to requisition protective masks so that coronavirus patients and medical workers could access them.
Then came toilet paper.
It happened in Europe and Australia. As the coronavirus starting spreading in the U.S., Americans cleared stores of TP, along with rice and frozen food. Retailers including Walmart effectively began rationing paper products by empowering managers to impose purchasing limits. Grocery stores scaled back open hours to replenish inventories. Social media blew up with photos of barren shelves.
All of that occurred in the first half of March. A lot has happened since. You’re seeing it unfold in real time, as am I.
The St. Louis Fed is deeply connected to communities throughout the district we serve, which covers all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. Part of a regional Reserve bank’s role is to represent the voice of Main Street. Right now, Main Street has a lot of questions.
To the extent we can in this space, we’ll try to explore and explain some of what’s happening amid a shock the world is experiencing: a pandemic.
Let’s start by understanding supply and demand in the context of “shocks.” To help, I sat down with St. Louis Fed economists Dave Wheelock, David Andolfatto and Bill Dupor.
In general terms, an economic shock is an unpredictable or unexpected event that impacts the broader economy.
A shock can be negative or positive, and it can affect supply or demand.
“I think of a shock as something that's not forecastable," said Wheelock, who serves as deputy director of Research. “You think about a weather shock—like in early March, people in Tennessee were hit by devastating tornadoes. That event was not forecastable outside of a meteorological context, and it caused tremendous damage and loss of life.
“Clearly, a novel virus that comes out of the blue is a shock,” he continued. “Shocks are unforecastable and can be disruptive in various ways. We focus here on how they can disrupt the economy, but they can be socially disruptive or politically disruptive as well.”
From a public health perspective, COVID-19 is taking a very real, very human toll. Efforts meant to slow its spread are changing day-to-day life.
A supply shock is an unexpected event that changes the aggregate (i.e., total) supply of goods and services in a market, up or down.
In the context of history, supply shocks have been caused by things like weather, war and labor strikes. For example, the 1973-74 oil embargo, in which OPEC members retaliated against the U.S. and other nations for supporting Israel, caused gas shortages and long lines at the pump.
“The way I like to think about it is, a supply shock is something that affects our contemporaneous ability to produce ‘stuff’,” explained Andolfatto, whose research includes monetary policy, blockchain and business cycles. “A hurricane that wipes out infrastructure could be thought of as a negative supply shock. Or, if a new invention comes out and, all of a sudden, I've become more productive, that's a supply shock—but in a good way.”
In January and into February 2020, manufacturing powerhouse China had ordered factories to remain closed to slow the virus’s spread. Financial headlines centered on potential supply chain disruptions for everything from electronics to artificial sweeteners to autos.
Economically, Andolfatto explained, the coronavirus “clearly fits that bill” of a supply shock. As the virus spreads, “it is affecting, contemporaneously, society’s ability to produce goods and services. It is a negative supply shock in that sense.”
A demand shock affects aggregate demand; like a supply shock, it can also affect prices.
“We economists think of the coronavirus as a being a supply shock. But a supply shock can, in turn, create a demand shock,” Wheelock said.
What happened with hand sanitizer and respirators “is a perfect example,” he noted. “You have the supply shock, it interrupts production, it causes all kinds of disruptions in terms of getting goods to market. At the same time, it has created a huge spike in demand for some products. People had a run on those products, bought all they could, hoarded them and cleaned out the shelves faster than the producers could realistically replenish the supply, or stores could keep in inventory,” he said.
As of mid-March, China’s new coronavirus infections have slowed, and the country is ramping up face mask production in response to demand. The state of New York is making hand sanitizer using inmate labor and distributing it for free, starting with high-risk communities.
And, turning back to oil: Slowdowns in travel and other economic activity due to the coronavirus have led to slumping oil demand amid a price war between Saudi Arabia and Russia that saw a surge in supply.
“This coronavirus has elements of both supply and demand shocks. The way to think about the demand shock is, it’s the information that affects our expectations of what might transpire in the future,” Andolfatto explained.
“So, if suddenly, in addition to my contemporaneous inability to produce output, I also believe that this is going to last for a long time, that's going to influence my actions even beyond the contemporaneous. The demand shock is how people are projecting this to unfold,” he said.
In March, life in America began changing.
Disneyland shut. The NCAA cancelled March Madness. Schools and universities went online-only. The weekend before St. Patrick’s Day, governors of states including Illinois ordered bars and restaurants to close. “Shelter in place” orders went into effect. Those businesses that could enabled their employees to work from home; others implemented furloughs. For yet others, the prospect of layoff decisions loomed.
The impacts of tough decisions made to protect public health and people’s lives will no doubt be felt financially by individuals and businesses. How might Americans alter their spending and consumption decisions? How might companies alter their plans to hire, produce or expand? What will happen to productivity growth? What will happen to workers?
Dupor has been studying the 1957-58 and 1968 flu pandemics that hit the U.S. Many changes have occurred demographically and in the labor force since then (e.g., more household members working, more high-contact service industry jobs) to say nothing of technology. It’s hard to draw parallels.
For this shock we’re in, he said, “The demand aspect may be more important than supply. There are supply-chain disruptions and those could be addressed; however, in two months it may be more likely that new car sales will be down because people are not buying, rather than because cars are not on dealers’ lots because producers couldn’t acquire parts for production.”
In his research, Dupor examines business cycles, economic stimulus and fiscal policy impacts, among other interests.
He noted how consumer spending in restaurants, travel, leisure, hospitality, and some retail trade sectors is falling because of precautions taken to reduce the spread of COVID-19.
Rather than trying to replace or stimulate that demand, which is a “natural byproduct of the caution,” Dupor suggested fiscal policymakers could incentivize behavior to align with recognized public health objectives during the outbreak. In addition, he said, fiscal policymakers could avoid concentrating the individual financial burden of the outbreak, or the policy response to the outbreak.
Meanwhile, the Federal Reserve is watching a myriad of factors to calibrate its monetary policy actions, in line with its statutory dual mandate of price stability and maximum employment. Among other measures, the Fed has acted to provide liquidity in the financial system here and abroad; to lower the target range for the federal funds rate; and to support the flow of credit to households and businesses.
See the Federal Reserve Board of Governors’ COVID-19 page for additional, up-to-date information.
The U.S. economy has weathered many shocks in the past century.
Wheelock, who is an economic history expert, explained: “If you're ever going to get hit by a bad shock, you want to be at a good place when it happens.”
In early 2020, he said, the fundamentals of the U.S. economy were strong, including low unemployment, low and stable price levels, and overall GDP growth.
Harkening back, Wheelock said, “In World War II, there were shortages of all kinds of consumer goods because of war production. You couldn’t get a car, you couldn’t get tires for the car, you couldn't get some kinds of food because it was all being used for the war effort.”
The government took several measures in response, he noted: “For one, they imposed certain price controls in order to limit the extent to which prices could shoot through the roof. But they also imposed rationing, so you had to have a coupon book with ration coupons that would allow you to buy so much sugar a month, etc.”
On a more personal level, he said, “During the oil embargo of the 1970s, my middle school ran out of propane, which was used to heat the building, in the middle of winter. And so we were sitting there shivering in our coats. But you couldn't get propane to heat the school.”
Back then, he said, it became a broader public policy question: “How do you want to share the burden to get through this?”