1. Home
  2. Operations
  3. Operational Risk Management

US sees easing of supply chain problems

Overstretched supply chains have hampered the US economy recovery since President Biden took office in January, but recent reports from the Wall Street Journal and Bloomberg among others suggest that the situation may now been improving.

The first 10 months of 2021 has seen the US enjoy one of the fastest post-recession job recoveries in history, a long-awaited upturn in business investment, rising wages and record household wealth,.However, shortages have caused rising prices and wages while inflation and the supply-chain crisis mean that many consumers feel worse off despite the recovery. One gauge of consumer sentiment at the start of November 2021 found 2021 Americans more pessimistic about the nation’s economy than at any other time since the Covid-19 pandemic began in early 2020.

Stoking inflation

As in many other major economies, the recent spike in the US inflation rate is seen as having three main drivers:

  • Lockdowns and the increase in working from home caused many consumers to devote a greater share of their incomes to purchasing goods relative to services; 
  • The government’s robust economic stimulus programmes to mitigate the impact of the pandemic gave consumers more disposable income to spend;
  • Lockdowns and the resulting ripple effects also impacted on the global supply chains that facilitate the creation and disbursement of consumer goods

Collectively these caused a mismatch in supply and demand and resulted in choked ports, a shortage of semiconductors, energy rationing, and rising consumer prices.

Policymakers have several options for restoring more of the balance. One is to reduce demand through policies that lower the amount of money that consumers have to spend, such as raising interest rates to increase the cost of credit and cutting social spending to reduce households’ disposal incomes, etc. This would ease inflation at the cost of slower economic growth and more consumers below the poverty line.

Alternatively, policymakers could hold off from measures to cool the economy in the hope that supply eventually rises to meet demand, as major manufacturing centres return to full capacity and firms expand production to meet with consumer demand. This approach comes with a higher risk of inflation, but also better prospects for growth and employment.

Causes for optimism

Recently the case for the latter option has strengthened as reports suggest that while global supply chain restrictions continue, the worst might be over. Reports have highlighted six more positive developments:

  • Shipping freight rates are falling. Since the start of November, the typical cost of a 40-foot shipping container has fallen by about 20% and the average global freight rate has fallen for eight consecutive weeks. There are hopes that this improvement will continue despite the approaching Thanksgiving and Christmas season in the US
  • Major US retailers have already stockpiled the goods they anticipate selling over the holiday season. The recent global supply-demand mismatch has long worried analysts but was anticipated by many major US retailers, which have steadily built-up inventory in anticipation. WalMart, Home Depot and Target reassured investors that they were well stocked ahead of the holidays. Firms’ balance sheets have supported these assurances. Despite robust retail demand, Target has US$2 billion more in inventory than it held at the same time last year, thanks to the company’s pre-Christmas preparations.
  • Backlogs at major ports have eased from record highs. The situation at major US ports has only eased slightly.  Last week ended with 71 container ships anchored offshore outside the ports of Los Angeles and Long Beach, while pre-pandemic such backlogs were unknown. However, the lines at ports have begun to move at a brisker pace: the number of container ships that have lingered at the Los Angeles port of L.A. for longer than nine days has dropped by about one-third since October, when the port started threatening to fine dawdling vessels.
    Analysts expect the strain on ports to ease considerably by next February, after the holidays have passed and China’s manufacturing sector has taken a week off for the Chinese New Year. Demand for shipping containers should fall significantly, just as investments in expanded freight capacity start to come on line.
  • China’s manufacturers are ramping up production. China’s government has long capped the prices that utilities can charge consumers for electricity. This year, as the global recovery sent  energy prices higher that regulation pushed many Chinese utilities to the brink of insolvency. With the cost of coal skyrocketing, and consumer price caps fixed, power plants have been forced to choose between operating at a loss or shutting down. In response, utilities began to ration electricity to both households and the manufacturing sector, forcing Chinese firms to scale back production. This exacerbated the global shortfall in the supply of goods. However, the government has now relented and authorised coal-fired plants to charge higher prices, easing the electricity crunch has eased and enabling manufacturing to return nearer normal capacity.
  • Covid-related factory closures eased in Southeast Asia. Earlier this year, coronavirus outbreaks in Malaysia and Vietnam forced authorities to limit production, which reduced the global supply of textiles and semiconductors. In the past month output at factories in Southeast Asia has rebounded, as case counts fell and normal production resumed.
  • US car production is reviving. In October, US manufacturing output reached its highest level since March 2019, largely driven by an 11% jump in the production of automobiles and car parts, while Toyota has set a December output target  above the company’s pre-pandemic norm. These developments suggest that the global supply of motor vehicles is steadily catching up to demand, while the global shortage of semiconductors is easing, having previously restricted ca manufacturing.

Not yet out of the woods

This tentative recovery in global supply chains could yet be undone. The global benchmark shipping rate is still 200% higher than a year ago, indicating that there remains a supply crunch in shipping capacity. Labour shortages are still hindering production globally. Developed countries are struggling to overcome a shortage of lorry drivers, while developing ones are still waiting for rural migrant workers who fled urban centres at the pandemic’s onset to return from their ancestral villages.

This vulnerability is exacerbated by the continuing absence of finance for a rapid global anti-Covid vaccination campaign, which leaves key production nodes especially exposed to new outbreaks; only about a quarter of Vietnam’s population is fully vaccinated, and cases there have risen sharply in recent weeks. Meanwhile, even in the West, vaccine hesitancy combined with winter’s return is breathing new life into the pandemic. Germany, a major global exporter, may follow Austria in reimposing lockdown as the pandemic tests its hospitals’ capacity once again.

Yet in the short term, the pandemic’s persistence could ease commodity crunches in some sectors. Locked-down economies use less energy than open ones, and thus, as case counts have climbed in Europe, oil prices have fallen. Yet ultimately, supply chains cannot fully recover until vaccines and antivirals render Covid a rarer and less serious ailment than it remains today.

Like this item? Get our Weekly Update newsletter. Subscribe today

Also see

Add a comment

New comment submissions are moderated.