Shortage of semiconductors, dubbed the 'new oil,' could dent GDP growth, boost inflation

Economic growth could slow and inflation is likely to see at least a momentary bump higher as the semiconductor shortage worsens, economists say.

A variety of factors have converged to make the coveted computer chips scarce. Soaring demand coupled with supply bottlenecks have led to a situation in which orders for everything from cars to televisions to touch-screen computers and more are on backup for six months or more.

With semis at the core of so much U.S. economic activity, the ongoing supply problems are likely to have ripples.

Goldman Sachs economists say that for the bulk of 2021, the shortage will translate into an inflationary tax that could result in prices rising as much as 3% for affected goods. That would boost inflation as much as 0.4 percentage points through the rest of the year, the firm said.

“Taken together, while we see relatively modest implications of the semiconductor shortage for GDP growth and the industrial sector, it represents another reason to expect core goods inflation to remain firm this year,” Goldman economist Spencer Hill said in a note.

Even though the hit won’t cause a dramatic slowdown to an economy expected to roar in 2021, the impact could still be noticeable. Goldman said the impact could reach as high as a 1% subtraction from activity, but likely will be closer to 0.5%.

“While semiconductors account for only 0.3% of US output, they are an important production input to 12% of GDP,” Hill said, nothing that the shortage could cut auto production by 2% to 6% this year.

Indeed, multiple automakers have curtailed production due to lack of chips vital to their vehicles.

Stellantis NV said it will be temporarily laying off workers at its Detroit Jeep plant, while Volvo also has said the chip issues will cause it to shut some plants until the situation is resolved.

The knock-on impacts of any disruptions in the semiconductor industry are becoming increasingly apparent.

“As the world becomes more interconnected, more automated and greener, each unit of GDP growth will contain a higher content of semiconductors. Integrated circuits are becoming the key commodity input for economic activity,” wrote TS Lombard economist Rory Green.

Green calls semis the “new oil” for the global impact that disruptions can cause.

“The current severe shortage of semiconductors, which is halting automotive production worldwide, underscores the speed and scale of the changes under way,” he said. “Chips have always been an important part for manufacturing and consumer electronics, but their use will broaden to transport and digital services.”

Still, Goldman’s Hill said the inflationary impact likely won’t last far as supply increases later this year and into 2022. But the shortage now “represents another reason to expect core goods inflation to remain firm this year,” he said.