Yes, I am a self storage person interpreting the economic data points and sharing how I see it fitting into our area of interest, self storage.
Now depending on which news silo you get most of your “news” from, you hear vastly different interpretations of economic data.
I say it is almost impossible, if not impossible, to draw any conclusions about the economy that do not reflect your political leanings. You don’t hear that from any of the experts who pontificate and/or report on what is going on in the economy.
I have my own political leanings, and it cannot help but color what I see and perceive around the raw data. Everyone has access to data, but most rely on others to tell us what it means.
I suggest, to whatever degree you can, coming up with your conclusions. I have discovered the “experts,” no matter what side of the political spectrum they reside on, are usually wrong.
Is what I will say in the next two episodes more enlightened than anyone else?
In my mind only.
Many of you know vastly more about economics than I do.
I have no credentials to back me up. Whatever experience I have, the data I can get my hands on, and the world view and filter I use to interrupt it.
It would not hurt my feelings if you paid zero attention to anything I have to say on economic matters.
Inflation
OK, let’s talk about inflation.
That seems to be the issue driving our economic landscape today.
If you lean to the right, you know that it is the Democrats that caused inflation. Biden’s big spending package bearing the misnomer the “Inflation Reduction Act,” as well as the Democrat’s war of the oil and fossil fuel industry, have been a major driver in ramping up inflation.
Overspending and making it hard for energy companies to produce. That is the root cause of today’s inflation (too high taxes and regulations fit in there somewhere as well).
If you are a “progressive” (I miss being called a “Liberal”), you know the oil companies are making record profits and ripping the public off by keeping gas and energy costs high. Everyone knows energy cost is the main driver in inflation today.
I am not going to argue for either side here. I think both are too simple to be right.
Let me share with you what I see, and I know what I see is not the total or the correct view.
Just an interpretation so I can move storage pieces on our playing board.
My hope is to give you a different perspective than perhaps the news silos you get your information from and help you draw your own conclusions.
I see four main causes and drivers for today’s inflation.
- The amount of money printed and in circulation today.
- Supply chain issues.
- Energy Cost.
- Worker shortages.
Let me take them on one at a time. In the next episode I will talk a little more about what I see in our economic future and how this will affect self storage in the next few years.
The Amount of Money In Circulation Today
I see the last two Presidents as big sources of the amount of money dumped into the economy.
The US government has sent out several rounds of direct payments to individuals and families since 2020 as part of various COVID-19 relief efforts. By the end of 2021, it was over $850 billion.
And in my opinion, it was not a totally bad thing. Yes, it had an “inflationary” effect, but the alternative could have been much worse.
In March of 2021, Trump signed the CARES Act, which approved $269 billion in direct stimulus payments to eligible individuals in the United States.
Remember, he wanted his name on those checks?
I guess I was deemed to have made too much money because we never received any. My doctor’s stepson did. I think they used it to help buy a pool for their backyard.
Not to be outdone, Biden’s contribution was the American Rescue Plan Act, which approved $372 billion in direct stimulus payments to eligible individuals.
I guess I was deemed needier because we did receive this check. It ended up in my wife’s checking account, so I am sure it was used to pay bills. She is very “value-oriented.” I think she still has the first dollar she earned
These two relief packages added significant money to the US economy, amounting to $641 billion.
Don’t forget the unemployment benefits everyone who could not work received during the mandatory shutdowns and afterward.
While this significant injection of money can help increase economic activity and support businesses and individuals, it may have heightened inflation, as more money was circulating in the economy than goods and services were available. This influx of cash can cause rapid increases in prices for goods.
Just look at storage rents. In 2020, the year Covid started, and the stay-at-home mandate was in place, self storage occupancy rose nationally by 2.3% over 2019, and rents went up 2.4%.
In 2021, according to data from Self Storage Resource Group, the average rent increase for self storage rents rose another 3. 1%. Yardi reported that REITs had over a 15% increase in storage revenue. This can be attributed to the continued increase in demand for storage units due to the pandemic, and the money consumers had to pay it even though many were not working (thank you, Trump & Biden).
Now we hear a lot from one of the political parties about the negative effects of the “2 trillion” Inflation Reduction Act being one of the main drivers of inflation.
I don’t see it having anywhere near the effect the direct stimulus checks and unemployment benefits did.
From what I can gather, The Inflation Reduction Act does not directly add more money into the economy like Trump’s, and Biden’s checks did.
Instead, it could work to reduce inflation by providing some financial assistance but a big emphasis on stimulating economic activity in certain sectors of the economy, reducing dependence on foreign manufacturers and supply chain issues, thus reducing consumer prices.
Example: Economic incentives for industries (like US chip makers) that showed up like a real problem with supply chain issues (reduced supply from overseas and extreme price hikes).
Also, funding for small businesses to support job growth, new infrastructure projects to spur economic activity, expanded childcare and school programs to increase access and affordability (so lower wage people can afford it to go to work), grants to support renewable energy projects, and incentives for entrepreneurs.
The design is to bring stability to the economy, lower prices for goods in targeted industries, and help businesses to invest in the future.
The exact opposite of what the Fed is trying to do. It is like the government is fighting against itself (guess what, it is).
We will see if the Inflation Reduction Act reduces inflation or increases it. My guess is it will reduce the cost of some goods and services while other will go up.
Supply Chain Issues
I remember in 2020, I couldn’t get the dog food for Bear, our dog, to be delivered to our house. We ended up switching to another brand made in the US.
Remember when you couldn’t get what you wanted?
We were told it was “supply chain” issues.
As the world has become more global and as the world has become less dependent on warehousing inventory and more reliant on just quickly producing products than shipping them, when Covid hit, much of the world’s production slowed down or ceased.
Less production, but demand sure kept going. We had even more time on our devices, and don’t forget we had the checks from Trump and Biden (as well as unemployment support while we were not working or working as much), so we kept ordering stuff.
Supply chain issues can contribute to inflation by causing a shortage of goods and services, which can increase their prices. Here are a few ways this can happen:
- Increased Production Costs: Supply chain disruptions can increase the cost of producing goods and services. For example, if storage construction relies on raw materials, let’s say steel from China, or components from a region that has experienced shut down or reduced manufacturing capacity in factories during Covid, the cost of these materials usually increases due to supply shortages, transportation disruptions, or other factors. The higher production costs can lead to higher prices for the final product.
- Reduced Supply: If a company, like a storage system fabrication company, cannot obtain the necessary raw materials due to supply chain issues, they may produce less of their product, leading to a reduction in supply. When demand for a product remains constant or even increases while supply decreases, prices rise.
- Shipping Costs: Supply chain disruptions can also increase shipping costs, which can be passed on to consumers through higher prices. For example, if a company has to pay more to ship goods due to a shortage of shipping containers or increased fuel prices, it may increase the price of its product to cover those additional costs.
- Labor Shortages: If there is a labor shortage in the supply chain, such as truck drivers, factory workers, or warehouse workers, it can slow down the movement of goods and lead to higher prices. This is because companies may have to pay higher wages or offer other incentives to attract workers, which can increase their production costs and lead to higher prices for the final product.
Some people blame the amount of money and financial support given to the US public during Covid as one of the main drivers for the worker shortage. It was easier to just sit at home and cash checks than work. The money was about the same.
Perhaps some validity to this, but changing demographics also has a lot to do with it.
But from what I can piece together, supply chain issues contributed to our inflation by increasing production costs, reducing supply, increasing shipping costs, and causing labor shortages, all of which can lead to higher prices for goods and services.
Energy Cost
Here is a loaded topic. Opinions run high depending on the political spectrum you sit on and your worldview.
From what I can gather, long-term investments in fossil fuels are down at least 55%.
As a result, energy production from fossil fuels is severely constrained, and oil reserves are low.
Now if you are concerned about the environment, this is probably a good thing, and higher costs for fossil fuels could quicken the inevitable switch to renewable energy. I think it will speed it up.
In my opinion, even $6 per gallon prices could in no way cover the actual cost of the use of fossil fuels, including production, transportation, distribution, and environmental impact. This is what I think people who lean to the political right miss.
But, like it or not, we still depend on fossil fuels.
Now unlike most other goods or services, higher prices at the pump cannot translate into more production.
If the oil companies took all the increased profits and invested them into the necessary infrastructure to increase production (which usually lowers consumer cost), it would take at least seven years for that to occur and affect energy pricing.
And given that most people, including oil companies, think the days of fossil fuels are numbered, why would they make such an investment?
Would you?
This is what I think most people on the left political spectrum miss.
Should the oil companies charge less and pass their profits back to consumers?
Probably.
But they do not have a fiduciary relationship with the consumers. They do to their shareholders. They have a legal obligation to maximize shareholder profits within legal constraints. So they are enjoying the profits while they last, knowing the fossil fuel days are going to be going, going, gone.
The energy costs will likely stay high. Energy costs are one of the main drivers in calculating inflation and the CPI (consumer price index).
Because energy prices will most likely stay high, the cost of producing and transporting goods and services also increases, which can lead to higher prices for other items in the CPI basket. As a result, energy prices are a major driver of inflation.
Worker Shortages
Unfortunately, I do not see a simple reason for the current supply of worker shortages. I see a combination of factors.
- The COVID-19 pandemic: The pandemic has led to increased health concerns and safety measures, which have led many workers to be reluctant to return to work. Additionally, the pandemic has disrupted supply chains, as discussed above, and caused some businesses to close or reduce operations, leading to job losses in many industries.
- Generous unemployment and direct stimulus payments: Also discussed above, the federal government and some states have provided expanded unemployment benefits during the pandemic, which has made it financially advantageous for some workers to remain unemployed rather than return to work. Don’t forget Trump and Bidens direct check payments, either.
- Demographic changes: The US is experiencing demographic changes, including an aging population and declining birth rates, which have reduced the number of available workers.
- Skills gaps: Some industries are facing worker shortages due to a mismatch between the skills that workers possess and the skills that employers are looking for. This can be exacerbated by changes in technology and shifts in the economy we are experiencing.
- Immigration policies: Changes in immigration policies have made it more difficult for some industries, such as agriculture and hospitality, to access the foreign labor they rely on.
Conclusion To Part One
What does all this have to do with self storage?
Everything.
Now I know my knowledge is not complete and most likely wrong in some areas I have written about here. But I have researched on my own and have made the above following conclusions about inflation in our economy today.
Why did I do this?
Because I have to guess what is going to be happening in the next few years so I can make the best moves I know how in the storage business. To know what is going to happen, I have to try to ascertain the root cause, so I can guess what is next.
I cannot get this from the news.
I will share in the next episode I see what is happening due to the inflation we discussed here and what strategies we are implementing based on what we see in the upcoming economic landscape.
My only recommendation is not to get all your information from one side of the political spectrum, which is what today’s “news is. Both have elements of what may be correct information, but neither is comprehensive enough and most likely incorrect.
There are no simple causes and solutions.
It is our job as business owners to navigate the waters and set our own course.
