Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping Supply Chains Beyond China
Transcript
- Lucas: So we talk a lot on this show about stagflation as a macroeconomic condition — inflation staying sticky while growth slows. But one thing we haven't really dug into is how this environment is physically reshaping where companies actually make stuff. Luna: Right, the supply chain conversation. It feels like every week there's another headline about a company moving production out of China. But is that really accelerating now, or is it just more noise? Lucas: It's real, and stagflation is a big reason why. Think about it: when you have persistent inflation, labor costs in China aren't the bargain they used to be. Chinese factory wages have risen something like 10 to 15 percent a year for the last decade. Combine that with shipping costs that are still elevated relative to pre-pandemic, and suddenly the cost advantage of 'made in China' shrinks. Luna: But we're also seeing this geopolitical layer. The headlines this week about Iran rattling energy markets, the Russia-China pipeline talks — it's not just about cost anymore. It's about reliability. Lucas: Exactly. And that's where stagflation creates a unique pressure. Normally, companies make sourcing decisions based on cost efficiency. But when inflation is high and growth is slow, you can't afford disruptions. A delayed shipment doesn't just annoy customers — it can break your margins entirely. Luna: So you're saying the move away from China is partly a stagflation hedge? Lucas: I think that's exactly right. The 'China plus one' strategy — where companies keep some production in China but add a second source in another country — that was already happening. But now, the 'plus one' is becoming 'plus two' or even 'plus three'. And the destinations are shifting. Vietnam and India still get a lot of attention, but the real story might be closer to home. Luna: Nearshoring to Mexico. I've seen that term a lot. But does it actually make sense economically? Labor costs in Mexico are higher than in Vietnam. Lucas: They are, but you have to factor in the total cost. Mexico is in the same time zone as the US. Truck transit from Monterrey to Dallas is about 24 hours. From Shanghai to Long Beach, it's two to three weeks. When you have high inflation and you need to keep inventory lean, that speed of delivery becomes a huge advantage. You can run a just-in-time model much more reliably. Luna: And we're seeing it in the data. I was looking at US imports from Mexico, and they've been rising steadily. For some product categories, Mexico is now the top trading partner. That's a structural shift, not just a blip. Lucas: It is structural. And it's not just about low-value goods. I'm thinking specifically about semiconductors. The CHIPS Act in the US is bringing some fabrication back, but a lot of packaging and assembly is moving to Mexico. That's a big deal because semiconductors are the oil of the modern economy. Luna: So this nearshoring trend — is it inflationary or disinflationary? On one hand, you're paying higher wages and maybe less scale. On the other, you get shorter supply lines and fewer disruptions. Lucas: That's the million-dollar question. In the short run, it's probably inflationary. Setting up a new factory in Mexico or Vietnam costs money. You have to train workers, build infrastructure. But over time, if it means fewer shocks, it could lead to more stable prices. The trade-off is resilience versus efficiency. Luna: Which brings us back to stagflation. In a stagflation scenario, resilience is worth paying for because the cost of disruption is higher. Lucas: Right. And look at the latest consumer sentiment numbers — we hit a record low this week. People are feeling the pinch. If a company can avoid a supply chain breakdown that leads to a price spike, that's a competitive advantage. So even though it costs more to produce locally, it might protect your brand and your pricing power. Luna: But not every company can do this. Small and medium-sized businesses don't have the capital to build new factories in Mexico. They're stuck with longer supply chains and more volatility. Lucas: That's a really good point. The nearshoring trend is mostly large multinationals. For smaller firms, the options are more limited. Some are pooling together in co-op arrangements, sharing warehouse space in border towns. But it's harder. Luna: And that could widen the gap between big and small companies, which is another dimension of inequality that stagflation exacerbates. Lucas: Exactly. So when we talk about stagflation reshaping supply chains, it's not just a logistics story. It's a story about which companies survive and which get squeezed. And that's a theme we'll keep coming back to. Luna: You know, talking about this makes me think about how useful it is to really understand these shifts. Not just the headlines, but the underlying forces. Lucas: That's actually the whole point of this show. We're trying to cut through the noise and give you a framework. And if today was actually useful to you, the way these stay ad-free is listener support. Luna: Yeah, a quick mention. If you find value in these conversations, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: No pressure at all. It just helps us keep doing this without any ads. And we really appreciate it. Luna: So back to the supply chain shift — one more angle I want to look at. What about energy? Because if nearshoring means more manufacturing in North America, doesn't that increase energy demand here? Lucas: It does. And that's another layer of the stagflation puzzle. Higher energy demand in the US and Mexico could keep upward pressure on prices, especially if geopolitical tensions — like the Iran situation — disrupt global oil supply. The breakeven inflation rate on ten-year Treasuries is around 2.4 percent, which is still elevated. The market is pricing in persistent inflation. Luna: So nearshoring could be both a response to stagflation and a contributor to it. It's a feedback loop. Lucas: Exactly. And that's what makes this period so tricky for policymakers. The Fed is trying to tame inflation, but structural changes in supply chains are pushing costs up. The real GDP growth rate is only 2 percent annualized — not terrible, but not booming. So we're in this delicate balancing act. Luna: Let's bring it back to something concrete. Give me one company or industry where you see this playing out most clearly right now. Lucas: I'd point to the auto industry. Automakers have been shifting battery production and assembly to Mexico and the US for a few years. But with stagflation, the pressure to shorten supply lines for semiconductors and rare earth metals is intensifying. Ford and GM are both building battery plants in the US, but they're also sourcing more components from Mexico. It's a giant logistics puzzle. Luna: And that takes years to execute. So the decisions they're making now will determine how they perform in the next downturn. Lucas: Right. And if the economy slows further, the companies that invested in resilience will have a buffer. The ones that didn't might face margin compression or even shortages. That's the stagflation edge. Luna: Alright, so to wrap up our piece: stagflation is forcing a rethinking of global supply chains, moving from efficiency to resilience, and that has its own inflationary consequences. But for companies that can execute, it's a competitive moat. Lucas: That's the bottom line. And it's a story we'll keep tracking as the data comes in. Thanks for listening.