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What the chip shortage means for the U.S. economy

The global shortage of computer chips can have a bigger impact than making it more difficult to buy the latest video game console or more expensive to buy a car. According to a new note from Goldman Sachs (GS), the slowdown in chip availability could reduce US GDP by as much as 1% by 2021.

In a research paper led by Goldman’s Spencer Hill, an analysis looked at the economy-wide effects of the shortage by assuming that a 20% shortage of chips lasts three-quarters and affects the 169 U.S. industries that use semiconductors in their products .

“There is no substitute available for some computer chips, and if the output of each product using chips were to decrease proportionately, the GDP drag would be about 1% by 2021,” the note said, noting that in reality the resistance is likely will be smaller. partly because companies will find ways to reconfigure their products.

US President Joe Biden delivers a semiconductor chip as he speaks before signing an executive order aimed at addressing a global semiconductor chip shortage at the State Dining Room at the White House in Washington, USA, February 24, 2021. REUTERS / Jonathan Ernst TPX IMAGES OF THE DAY

Still, the prices of goods affected by the deficit – including automobiles and consumer electronics – could also rise by as much as 1% to 3%, which, according to Hill, could temporarily boost core inflation by 0.1 to 0.4 percentage points.

And while semiconductors in the US make up 0.3% of the nation’s GDP, the components they go into make up a whopping 12%. In addition, both Intel (INTC) and TSMC, two of the world’s largest chip makers, have said the delays in chip manufacturing could last until 2022.

Why is there a huge shortage of chips worldwide?

The global shortage of chips started at the beginning of the pandemic, when car makers, assuming that car and truck sales would collapse due to lockdowns, began to slow down purchases of various components, including chips.

Those chips have become essential over the years for cars that control everything from fuel economy to diagnostics and their infotainment centers.

Car manufacturers around the world have been forced to shut down factories due to the global shortage of chips. (AP Photo / Carlos Osorio, File)

But auto sales rose much faster than manufacturers predicted, with the Semiconductor Industry Association (SIA) saying that while car and truck purchases collapsed in March and April 2020, they had already recovered in Q3 and were higher than in 2019 in Q4.

Story continues

Automakers are notorious for keeping their supply chains lean to restrict on buying components. But in this case, it failed spectacularly, as the industry was forced to grab as many chips as possible from semiconductor manufacturers.

At the same time as automakers predicted a drop in sales, consumer goods purchases soared due to the influx of employers and schools pursuing home-work and home-learning policies. As a result, both industries competed for the manufacturing capacity of semiconductor companies.

However, it is not only consumer electronics and car manufacturers that use semiconductors. As Hill points out, an estimated 169 U.S. industries integrate computer chips into their goods.

Adding to the problem is the fact that producing computer chips is incredibly time consuming. The SIA says chip building can take three to four months, while more advanced units can take as long as six months.

The result is automakers including Ford (F), GM (GM), Honda (HMC), Toyota (TM) and Volkswagen idling plants in the US, with car production expected to decline between 2% and 6%. On the electronics side, the shortage has caused similar headaches, including a whopping 60 weeks of delays on goods such as computer routers for broadband providers, and chip giant Samsung saying it may have to delay its popular Galaxy Note smartphone until 2022.

Both Microsoft (MSFT) and Sony (SONY), which launched their latest game consoles in November, were also hit by the chip crisis, with customers not being able to order the systems for months.

In fact, President Joe Biden has linked the US chip shortage to his $ 2.3 trillion infrastructure plan, saying the US should become the leader in semiconductor manufacturing. The US used to produce about 37% of the world’s computer chips. However, when outsourcing to Asia, that number has dropped to just 12%.

But things may not all be bleak and ominous. According to Goldman, a 1% hit on US GDP could be an outside scenario. According to Goldman, US GDP is more likely to take a 0.5% hit as companies use fewer or different semiconductor components and the available chips end up in higher value products.

And inflation on consumer electronics? That may be temporary, as the surge in semiconductor demand could spur a plethora of tech gadgets, causing prices to drop in 2022.

Certainly chips and the goods that depend on them will be scarce for the foreseeable future. But the ultimate outcome of the deficit may not be as bad as once feared – as the title of the Goldman note suggests, it’s just a “semi-disturbing” deficit.

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