Pirates, Lag Effects, and Other Risks

By Bolton February 6th, 2024

By Zack Fritz, Sage Policy Group

If you had a bingo card of economic risks for 2024, you almost certainly wouldn’t have put piracy on there. Yet pirates—actual pirates—in the Red Sea are causing serious issues for global supply chains. Due to ongoing attacks on civilian shipping vessels, a significant portion of traffic has diverted from the Suez Canal to instead go around the Cape of Good Hope, with recent data from Linerlytica suggesting 80% of all boxships have rerouted. As a result, global freight rates, as measured by the Freightos Baltic Index, have increased a staggering 127% since the last week of 2023.

This is an unfortunate setback for supply chains, which had not only recovered from COVID-19-related disruptions but were in the best shape in several decades. Freight rates, which spiked more than 700% from the start of the pandemic to the end of 2021, had fallen back to 2019 levels, and global supply chains faced the fewest disruptions in over a decade according to the New York Fed’s Global Supply Chain Pressure Index.

Piracy is but one of several geopolitical risks to the outlook. Conflict in the Middle East and Europe is ongoing. Aside from the aforementioned piracy, that has yet to have a material impact on the domestic outlook, yet if those conflicts expand it could put upward pressure on oil prices. Record levels of domestic production have pushed gas prices down to the lowest level in years, but a rebound in pump prices could suck some of the life out of the demand side of the economy.

Beyond armed conflicts, 2024 will be a record year for elections, with approximately half of the global population slated to vote (or at least have the opportunity to) this year. That alone could provide a source of significant geopolitical turmoil.

While these geopolitical factors don’t necessarily imperil the U.S. outlook, there are other headwinds pushing on growth. Interest rates have now been elevated since the Federal Reserve started tightening monetary policy in March 2022. It’s typically thought that higher interest rates take 12 to 18 months to impact economic growth, and we’re now well past that window. While the economy has already withstood many of the associated impacts, like a paralyzed housing market, it’s possible that the lagging effects of elevated borrowing costs could diminish growth this year.

And then there’s labor shortages. While labor availability has gradually improved over the past year—job openings have declined from a record 12 million in March 2022 to a still-elevated 8.8 million in November 2023—there are still far too few workers to meet employers’ demand for labor. This has put upward pressure on wages which, as of December, continue to rise at a pace that is inconsistent with a return to 2% inflation.

There are also some initial signs of a once again weakening labor supply. After the labor force participation rate steadily increased from a nearly five-decade low of 60.1% in April 2020 to 62.8% in November 2023, it plunged in December, falling to the lowest level since February. While that might be a statistical aberration—labor force data can be volatile from month to month—ongoing labor force declines would serve to limit hiring while also pushing wages, and therefore inflation, higher.