This article is part of my MegaTrends 2030 series.
The Perfect Storm to End an era of CHEAP
We are witnessing a perfect storm that has been 25 years in the making. If you understand the talking points below, you’ll know more than most.
I must admit this ending has snuck up on me. We consumers have had an amazing run with cheap goods and services but that window is coming to a close. Low U.S. wage gains ran parallel with lower prices of imported goods — so we became better buyers to delay the pain. Yet, hang on to your wallet and cherish the memories of the too-good-to-be-true pricing we’ve enjoyed for the past 25 years. This milestone can create opportunity for those who will accept a new normal of higher prices and consider how to innovate toward the resulting pain. Here’s why:
TRADE: Over 70% of Walmart products are made in China today. How did that happen and why does that matter? When the tariff-free GATT and NAFTA trade deals were struck in the early 90s, the gates opened wide for cheap U.S. trade with Mexico, Canada, China and others with foreign factories able to enjoy nearly zero environmental costs. At that time, overseas factory wages were 1/25th the average U.S. factory wage and freight to our borders was cheap. Today, those foreign workers are commanding wages of ¼ of the average U.S. factory wage — a 600% increase. Simultaneously, delayed by COVID pandemics, U.S. workers are being wooed at the highest pay rates and most flexible benefits in history. Businesses cannot find workers! How did global skilled workers get so fortunate? The answer is a permanent reduction in available workers due to population declines. When industrialized nations have an average family of 1.5 children over 25 years, the shortage is not urgent until those nations cannot find workers — which is today and it’s permanent. The global COVID pandemic moved the elder Boomers into retirement and there is a sudden gap in knowledge and bodies. Even in China, there are fewer migrant workers going to city factories, tightening labor. When we combine their higher cost of labor and the higher freight costs discussed below, we can assume U.S. retailers’ overseas model is under great stress. Further, if China invades Taiwan, all our “stuff” manufactured in China is in jeopardy due to new trade boycotts. Cheap has never been so threatened. Here in the U.S., workers have such choice today that 50% of those who change jobs also change professions. Failure to staff is seen as the #1 risk to companies around the world — a brand new issue. This means reworked industries, less output and higher prices until robotic masses come to the rescue. Yes, robotic solutions are a great place to focus. Also, buying from geo-political friendly countries is most likely as we cannot continue to enrich our enemies whose bad behavior is now live on social media.
ENERGY: Simultaneously, the fall of the former Soviet Union over 30 years ago enabled the longest and most productive peacetime era whereby cheap energy could come from whomever would produce it — and Russia became a huge player — and Europe became dependent. This bigger, open energy market coincided with improved oil and gas drilling technology enabling much larger production volumes and cheap distribution — so much that the U.S. was able to finally export oil and gas — until recently. As the war in Ukraine has revealed, the U.S. and its allies will need to boycott the energy of selected global tyrants — removing considerable supply for many years to come. U.S. policy toward domestic production will determine if gasoline is $3.25/gal or $5.00/gal. Also note, cheap fuel enabled cheap freight. The cost of a shipping container from China to the U.S. has increased 10X in just the last 10 years. Freight costs will become a strategic weapon and I believe distributors like Amazon, if they can truly integrate last-mile delivery, can forever stay ahead of retailers. Sustained high overseas freight costs will be a serious boost for Mexico. Look for fuel surcharges on every invoice for many years to come. Finally, home heat and electric costs are up 10–40% depending upon where you live. These costs were afterthoughts for so long — but no longer. Energy efficiency solutions will have great opportunities going forward as well as lightweight innovations.
FOOD: Agriculture product prices must increase and that hurts most families. The three main input costs to the farm: Grain for animals, fuel for tractors and fertilizer for crops (made from natural gas) have skyrocketed. Thus, their output must be priced higher and that means more expensive groceries for the foreseeable future. We’ve enjoyed cheap food for a long time. Yet, with so much global geo-political influence upon U.S. farmers, reducing costs is not something they can control whatsoever. Additionally, climate change is making rainfall amounts less predictable and so good yields are more hit-and-miss. Did you know 34% of U.S. farmers are 65 and older? When you add the resulting food cost increases and labor shortages together, you get a complete retooling of the restaurant model which is underway. There will be less product in every package as food manufacturers try to hide the effects but the American budgeted diet is going to change permanently. Farm-to-table direct buying groups should flourish.
HOUSING: The biggest drain on family budgets is their housing cost and we have hit the limit on affordability for renters considering that food and fuel are more critical. U.S. renters are paying over 31% of total income toward housing and this will soon create a massive reckoning for family budgets. In many cities, rents have increased 30–40% in two years. For home owners, In the last decade, the median home price rose roughly 30% and incomes crept up just 11% over the same time period. Over 50 years, the difference is even more striking. After accounting for inflation, home prices have jumped 118% since 1965, while income has only increased by 15%. This data doesn’t include the post-COVID boom. There is a shortage of housing and the cost and availability of materials and labor to build more housing have further increased. People will have to migrate to lower cost-of-living cities or smaller units to find relief as I do not believe the government will allow housing values to crash again (like 2010). I continue to believe that the U.S. housing luxury is an unsustainable marketing bonanza and a more practical view of what is both acceptable and affordable must evolve. If not, the average American will have expensive housing and less of everything else. Innovative, smaller housing solutions will soon be a growth industry.
In summary, you and I likely witnessed the cheapest phase of human industrialized history. Cheap was made possible by plentiful and freshly-leveraged foreign labor, abundant food and energy, powerful computing and internet connectivity, imbalanced environmental standards, cheap freight and affordable housing. We have reached a cathartic limit. Global powers will use trade (reward) or boycott (punishment) as the behaviors of totalitarian regimes become harder to ignore — and now we must pay for all of the value received that includes the past and present cost of politics, wars, poor planning and bad policy. Going forward, it will matter more to be energy-efficient, locally-sourced, automated, robotic, smaller and nimble.
Cheap is over. Plan on it and create good solutions for yourself and society.
-M