No Match Found
Historic consumer demand for goods. Heightened geopolitical unrest and uncertainty. Shortages of inputs and workers. Long lead times. Potential port shutdowns. Supply chains are being stretched today in many ways, and traditional avenues for relief aren’t promising in the short term. Business leaders need to better understand the components of the economy that can help drive supply chain normalization and reassess their supply chain strategies and operations accordingly.
While some improvement is possible as demand and supply become more balanced in the coming months, we don’t expect supply issues to be fully resolved until 2023. Our analysts cite several reasons.
Hanging over all of this is inflation, driven largely by the strong demand for durable goods and resulting in higher prices across categories. Our analysts expect inflation to start moderating this summer, but some pressures are likely to linger, and price growth could stay well above the Fed’s 2% average inflation target in the coming years.
Where things stand: US shipping volume demand remains robust, and while congestion across West Coast ports has eased somewhat, it’s growing at alternative ports along the East Coast and also is up in China and Europe.
What to do: Adjust forecasts to allow for persistent global port congestion in the short term, with only gradual easing in the second half of the year. If heavily reliant on trucking, budget for higher freight costs and watch for changes in transportation job growth. Other key indicators: Ships at anchor and inbound container traffic at US ports, retail inventories.
Where things stand: Recent COVID-19 restrictions in some East Asian economies and disruptions from the Russia-Ukraine crisis have unsettled the complex and fragile semiconductor supply chain, and chip supply likely will remain tight through 2022. Even with new fab construction within the industry, supply may not fully clear demand for several months.
What to do: Scenario planning should include real-time response to any new pandemic measures being taken in other countries and monitoring of East Asian manufacturing output and semiconductor and electronics exports. Consider bringing semiconductor design in-house and contracting out manufacturing, as well as exploring partnerships with semiconductors vendors and their distributors. Other key indicators: Fab utilization rates, day sales of semiconductor inventory at major OEMs.
Where things stand: In most sectors, the ratio of job openings to hires is higher than before the pandemic, our analysis found. That has pushed up wages, particularly in leisure and hospitality, education, health care and professional services. Factors such as accumulated savings, an aging population and new work preferences could keep labor supply low.
What to do: Revise compensation strategies to account for longer-lasting wage pressures and wage growth that likely will settle at a higher rate than before the pandemic. Other key indicators: Labor force participation rate, payroll growth in manufacturing and transportation.
Where things stand: The global supply outlook for crude oil, refined products and natural gas has weakened, and prices will likely peak by midyear with a downward correction afterward, although not to pre-2022 levels until 2025. Tapping the US Strategic Petroleum Reserve may offer near-term relief, but that and additional output from OPEC may not fully offset the Russia supply shock.
What to do: It’s critical to budget for higher energy prices that are likely to rebalance the disrupted market. Be prepared to react to any new communication from OPEC members and adapt to China’s evolving industrial policy.
Where things stand: Materials prices are key factors in input costs and corporate profits, and short-term price hikes should give way in early 2023. Increases in US chemicals inventories should provide a cushion in pricing. Aluminum has been impacted by Russia sanctions, with higher prices likely through the rest of 2022. Even with recent disruptions, copper prices should decline as near-term supply appears adequate to meet demand. Steel faces more uncertainty, as raw materials are under more cost pressure and increasingly becoming unavailable.
What to do: Pivot for global energy price shifts and prepare responses for one-off events — weather, geopolitical or other — that could disrupt materials production. Other key indicators: materials freight costs, mine utilization data from key production countries (e.g., Peru and Chile), US steel import growth, status of Section 232 tariffs.