After Sudden Supply and Demand Shocks, What Does A Recovery Look Like? – Institutional Investor

By Evan Peterson, CME Group

AT A GLANCE

Econ Essentials, a program created in partnership with Futures Fundamentals and Discovery Education, is designed to help high school students learn about core economic principles. Aiming to connect these concepts to current events, a new resource for teachers and students addresses the challenges of sudden supply and demand shocks and what weve learned from the past year.

When airlines were forced to restrict international flights in 2020 as a result of the COVID-19 pandemic, it began a shakeup of the industry. Major carriers could no longer offer as many flights and demand for the flights they did offer dried up. In the third quarter of 2020, the average U.S. domestic airfare declined to $245, the lowest level seen since at least 1995 in inflation-adjusted terms. Despite the lower prices, demand remained severely depressed, resulting in nearly empty planes. As the U.S. and other economies slowly emerge out of pandemic-related restrictions, we can still see the lingering effects of the swift change in supply and demand for many goods and services.

Anew learning tool created by Discovery Education in partnership with Futures Fundamentalsuses examples from the current environment to provide students a useful example of what happens when supply and demand changes suddenly and drastically. This resource is available for high school-level classrooms, and it comes at a moment of economic change we are not likely to see again for some time.

Airlines illustrate the sudden supply-demand shocks of the COVID-19 era as much as any industry, but they were by no means the only ones affected.Meat,lumber,industrial metalsandinternational shippingare all industries greatly affected by COVID that weve covered on OpenMarkets. At the onset of the pandemic,CME Group Chief Economist Blu Putnam took questionsfrom students about his thoughts on how COVID-19 was upending industries and our daily routines. We checked in with him again to discuss the supply and demand dynamics of the past year, and what we can learn from the situation. Following is our conversation.

Blu Putnam:The pandemic accelerated a trend toward more flexible work arrangements for office staff. This has allowed people think about living outside city centers, moving to the suburbs or even more rural areas. This people movement has led to a boom in housing prices outside city centers.

Businesses also learned during the pandemic that virtual meetings could replace many in-person meetings. So, post pandemic, many companies are moving to a hybrid model of virtual meetings with fewer in-person meetings, and that means business travel will not return to pre-pandemic levels.

The education sector was heavily impacted by the pandemic shutdowns, with large job losses. In a post-pandemic world, many educational institutions will not return to the old model. Even as students return to classrooms, some learning will remain virtual, and not all the former workers will be rehired.

Blu Putnam:Pent-up demand is most commonly used to refer to the services that people consumed before the pandemic and then were denied during the shutdowns. As the economy reopens, there is pent-up demand for going out to eat, to travel, to go to concerts or sports events, etc. During the pandemic shutdown, consumers shifted spending away from certain services and increased on others such as household goods, home improvements, etc. Spending on formerly denied services is expected to boom in the rebound from the pandemic.

Gasoline prices at the pump are another interesting example. When the shutdown hit in March-April 2020, airlines stopped flying, and people did not drive as much. Gas prices dropped. Now that travel is coming back, both on the road and in the air, gasoline prices have moved considerably higher.

Blu Putnam:The pandemic shutdown was abrupt. There was a certain amount of hoarding and panic buying of essential commodities. That phase ended after several months as supply adjusted.The rebound from the pandemic is not abrupt like the start was. The rebound progresses only at the pace of the economy reopening, related to vaccine distribution and declines in Covid-19 cases. That is, the transition to a post-pandemic world is a much smoother process than the abrupt nature of the pandemics arrival.

Blu Putnam:The best examples of how to analyze abrupt events are actually found in physics in the study of phase transitions. Think about water when it is heated and goes from a liquid to a gas. All the turbulence is at the boundary or the surface of the water as it comes to a boil. The most severe economic turbulence was in the first few months of the virus arrival.

The fast-spreading virus created a type of cascading system failure resulting in part of the economy being shut down immediately a traumatic shock. Recovery from a traumatic shock is a slow process, and one is changed by the experience. That is,the economy does not revert back to its pre-pandemic state, but finds a new dynamic based on the lessons learned.

Blu Putnam:When the shutdown hit, technology allowed for a rapid shift to a higher percentage of online shopping relative to visiting brick and mortar stores. The online shopping pattern was already gaining traction before the pandemic, and COVID-19 accelerated the trend.

Education was an industry that struggled to adapt to the pandemic shutdown. Online learning or distance learning had been slowly gaining some traction, but, all of a sudden, teachers in traditional classrooms had to learn new skills to teach online. Students had to adjust to the spending time in front of a computer instead of being in the classroom. While most office professionals adapted well to virtual meetings and working from home, educational institutions largely struggled to switch to a high-tech delivery system.

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After Sudden Supply and Demand Shocks, What Does A Recovery Look Like? - Institutional Investor