When Will Supply Chain Return to Normal?

Supply strains, although still significant, are no longer as menacing as they were six months ago. The stress has eased from peak levels (especially in the U.S.), adding less inflationary pressure. Although there have been modest improvements, as the economy recovers from the pandemic, an oversupply of goods may lead to a slowdown in demand that could reverse growth.

Will the cycle repeat itself?

“Pressures in the global goods sectors, which have been a central driver of inflation, may finally be easing. The bad news is that this looks to be occurring on the back of a slowing in the global consumer’s demand for goods, especially discretionary goods, and thus may also signal rising recession risks,” says Citi economist Nathan Sheets.

Citi analysts cautioned against declaring an “all clear” on the supply front, as global supply chain clogs will likely remain for some time. This year’s holiday shipping can be pressured and obstructed by labor strikes, factory disruptions tied to Covid outbreaks in China, and Russia’s war in Ukraine.

Demand

Demand for merchandise is critical to watch in the coming months, so economists are concerned about whether it will stay consistent. One private indicator suggests that as people dine out, see shows and travel more than they did during the pandemic—demand may return to normal.

The Post-Covid Indicator, created by Flexport Inc., monitors how Americans spend their paychecks. The most recent report:

“Consumer preferences shifted slightly away from goods in May.” The indicator is forecast to “hold close to current levels throughout the third quarter of 2022. That would imply that overall consumer preferences for goods over services will decline but remain slightly above summer 2020 and pre-pandemic levels.”

Federal Reserve

The Federal Reserve is set to raise interest rates later this month to combat the increasing inflation. Also, businesses continue to deal with supply problems, but the central bank’s recent reports suggest that these issues are less severe.

Shortages

Freight rates have dropped abruptly from the record highs they’ve reached in recent months, leading some observers to question whether there is now too much capacity available—a situation that had seemed unlikely just a short time ago.

While container rates have risen above pre-pandemic levels, their trajectory increasingly reflects a slide that still has not found the bottom amid uncertainty about consumer spending.

Returning to Normal

The global supply chain’s recovery depends on China’s ability to keep factories open amid recent covid outbreaks. On Thursday, the country released figures showing that June was its second-highest export month in at least three decades. After Shanghai lifted its restrictions on the spread of viruses, production rebounded and delivery times shortened.

On the other hand, Europe, for its part, is facing problems with shipping because of conflicts in Ukraine and the associated sanctions on items to and from Russia. Labor disruptions in one of Germany’s largest seaports have also slowed the global supply chain.

Supply

Another indication that the supply stress is not likely to recover soon is the Commerce Department’s most recent report. The report showed that American sales rose more than the economists forecast in June.

After examining the latest numbers, Yelena Shulyatyeva and Andrew Husby of Bloomberg Economics concluded that “there’s still enough momentum for the US economy to grow during the rest of 2018 as consumers find ways to cope with surging inflation.”

This could be good news for container imports into the US, which have been consistent all June and most of July in major ports in California.

Optimism for the U.S

Gene Seroka, the executive director of LA’s port, is cautiously optimistic about the rest of 2022.

“We’ll be seeing back-to-school, fall fashion, Halloween, and the all-important year-end holiday goods coming across the Pacific in the weeks and months ahead. Even though some retailers have high inventories and may look to discount goods, I expect imports to remain strong – though tapered -versus last year.”

Despite the optimism, there is congestion building causing delays in one of LA’s docks. Containers are sitting for about eight days; ideally, the time should not exceed two weeks. “Stakeholders need to take action now to avoid a nationwide logjam,” warns Seroka.