Breaking Down the SUpply Chain

By: Nick Kinsella

Move over, Covid; there’s a new crisis dragging down the economy this fall. What simply started as a semiconductor shortage earlier this year has now spread into the global supply chain. Endless raw materials and products are facing shortages and indefinitely delayed delivery times. Manufacturing output has stalled, and prices of inputs are surging, spilling over to a rise in consumer inflation So, what’s causing the hiccups in the supply chain? For starters, the recovery and movement away from the pandemic have been different across global economies. While the United States and most Western nations began easing restrictions this past spring and summer, many Asian economies have remained in lockdowns. This has left manufacturers there unable to fulfill the unprecedented return in demand. For example, U.S. auto sales rebounded swiftly last year after consumers began traveling again or purchases new vehicles with a boost in their income. Suppliers were unprepared for this and couldn’t keep up with the volume. Semiconductor production is a delicate process, and it can take weeks, maybe even months, to get it up and running again. Specific machines can only produce certain chip designs, and swapping production among manufacturers requires an exchange of licensing and intellectual property. This has caused new vehicle sales to tumble from over 18.3 million sold at an annualized rate in April 2021 to only 12.1 million this September. Diminished shipping is another component of the bottleneck story. Southern California ports, the ones that receive a majority of Asian imports, have become severely clogged. Container ships are arriving at the docks and are forced to remain idle off the coastline, as consumers demanded more physical goods and large, bulky home improvement items over the past year. Port congestion isn’t the only problem, however. There is also a shortage of capable trucking, warehouse capacity, and labor for the remaining half of the supply chain. West Coast ports aren’t very large, to begin with, and when you add in the heavy traffic that major municipalities have, the logistics between dropping off containers and picking them up have fallen apart.

The end is not in sight for many of these bottlenecks, and many economists believe that they won’t completely resolve themselves for possibly a year or more. Combining supply chain disruptions with a shortage of labor and easy fiscal and monetary policies has caused many to be worried about inflation. After failing to generate above a 2% inflation benchmark for the past decade, the U.S. economy has seen more than four or five percent year-over-year price gains in recent months. Government officials have expressed that these inflationary pressures are largely transitory and will subside to normal levels over the coming year. However, consumers and businesses expect higher prices to hold, with both the New York and Atlanta Federal Reserve Banks conducting surveys and finding 1-year inflation expectations are over 5% for consumers and 3% for businesses, both of which are record highs.

Overall, the pandemic uprooted the world economy over the past year and a half for several reasons, yet it appears the longest-lasting effect may be crumbling logistics. For decades now, globalization has fed the growth of both advanced and emerging economies. Today, we finally see the consequences of success.