Dr Jeff Cornwall

During the last economic expansion entrepreneurs constantly battled to find workers. Staffing shortages were the major challenge that the entrepreneurs who I was working with complained about. This recovery has created a new challenge: supply shortages.
Why are inventories so low? Businesses have been slow to ramp up production during the current expansion even though the economy was clearly picking up. Just this past weekend, I was talking with small businessman who said that even though their revenues had increased dramatically this past year they still had not really expanded their work force since their post 9/11 layoffs. They were falling behind on some orders, but he was still not sure they should add staff or inventory.
The current expansion has seen an unusually slow employment recovery. Why? In large part it is because we are still waiting for the other shoe to drop. Entrepreneurs remember that after the 9/11 attack, those businesses that were already running lean and tight were the most likely to survive the dramatic shock on the economy that followed. There is a general, yet usually unspoken fear that there will be another ?event?. So they are being very cautious. They don?t want to be caught with large inventories and bloated payrolls if the terrorists strike again. Entrepreneurs have a general sense of confidence in the economy, but they just don’t trust that events will allow it to continue.
This caution has led to the current shortages in supply. As the economy has gotten red hot, the capacity is just not there to meet the growing demand. Russell Sheldon, a senior economist at BMO Nesbitt Burns in Toronto, states in a commentary published in the Nashville Business Journal that these shortages are widespread. ?Inventories at all stages of production plunged relative to sales in the initial months of this year. All three levels – manufacturing, wholesalers and retailers – are very short on inventories.? I see it in my neighborhood where construction has slowed due to material shortages, while demand for new houses is stronger than it has been in years.
Sheldon and other economists warn of what these shortages can create. It is demand-pull inflation. Many entrepreneurs had not experienced an economic downturn before the recession that began in early 2001. Even more of them have not known of the challenges that inflation can create for business leaders. The last serious period of such inflation was 1979, when we saw prices grow at a double-digit rate. I remember, as I had just finished by MBA in finance from Kentucky and very few of us in that graduating class could find meaningful work.
Hopefully the Fed can keep inflation in check this time. We learned from the inflationary periods of the 1960s and 1970s that panic over rising prices only made inflation worse. So we all must do our parts to keep inflation under control. Knowing why we are facing this challenge may help toward this end.
But, things are no longer as predictable and simple as they once were. The attacks of 9/11 were aimed directly at our economic system. And they got a direct hit. We are at war. The war has come to our shores, and the enemy intends on attacking the very foundations of free enterprise and our way of life. In many ways, entrepreneurs are the economic foot soldiers of this part of the war. And much more is at stake than simply their businesses.