The Collapse in Demand Due to Lockdowns
The supply chain story starts around March 2020. Although some countries in Asia and Europe had already gone into lockdown due to COVID 19, the U.S. shutdown accelerated global challenges.
The U.S. is the largest importer of goods by dollar value, followed by China. However, much of China’s imports are input material for exports. The U.S. is expected to import over $3 trillion of goods and export $1.9 trillion in 2022, leaving a nearly $1 trillion trade deficit. Comparatively, China could have a trade surplus of $650 billion. So, distortions in U.S. demand affects the need for global capacity and production of goods.
Granular monthly data shows the sudden and sharp collapse in the import and export of goods around March and April 2020 due to the initial shutdowns and the dramatic fall in U.S and global consumption.
Companies around the world assumed that consumption demand would be hampered for months. So, they curtailed some of their manufacturing processes in response.
A shortage of labor in select markets further exacerbated the shortfall in goods. There were also certain industries where input material was redirected towards markets that were anticipated to have ongoing demand, like semiconductors.
The Resulting Rise in Savings Fuels a Spike in Demand Shortly Thereafter
Perhaps the most interesting development of the short term shortage in purchases was the outsized impact on savings.
U.S. household savings suddenly spiked in March, April and May 2020. We can also observe a similar trend in other developed markets, where consumption is a large contributor to economic performance. This newfound wealth was quickly redeployed into the purchase of goods.
This sudden shift in consumer behavior caught many companies and manufacturers off guard. Restarting assembly lines and procuring input material is a complex affair. In some cases, products like semiconductors were rerouted for the foreseeable future.
Then, there was the added issue of labor markets. COVID 19 was a rolling event. So, different countries saw spikes at different times of the year. This means shutdowns were also uneven.
A provider of input material for washing machines may have shut down in May, creating a backlog of product. By the time they reopened, the country where the machines were assembled may have shut down in August. So, time and distorted labor conditions worked against the availability of goods.
The initial phase of supply chain challenges was a demand led event, beginning with volatility in savings. As savings rates fall, however, demand may have become less of a driving factor.
Goods Production Increases in Response, But Transport Challenges Delay Availability
Once savings and demand started to normalize, the availability of supplies remained a challenge. The good news is that data now suggests that the manufacturing and availability of goods has started to normalize as labor is available to produce certain types of goods.
For example, China Manufacturing PMI jumped back above 50 in April 2020 – indicating an expansion in manufacturing. It remained in this range up until the Omicron variant emerged. After a brief contraction, it has moved back into expansion territory.
U.S. Manufacturing PMI is even more robust, inching above 60 last summer. While the figure has declined recently, U.S. manufacturing continues to expand. This means goods are being produced, but maybe not at the levels necessary.
Productivity levels in the manufacturing sector are also rising, but perhaps not as quickly as needed. More importantly, moving produced goods remains a challenge as the availability of ships and containers is still constrained.
The costs to move a single container from Shanghai to Los Angeles increased 5x in the past 18 months. Also, the percentage of global goods waiting on ships is at a multi year high due to bottlenecks at the port.
Data from the U.S. Bureau of Labor Statistics indicates that jobs related to port activity and trucking are still not back to pre pandemic levels. And even if the sea based movement of goods normalizes tomorrow, the post-port movement could remain a challenge.
The Road Ahead: Wage Growth, Normalizing Supply Constraints
A further drop in savings could provide additional downward pressure on demand – mitigating some of the supply shortages. However, wage growth has been very volatile in recent months and could rise in the near term. This could then counterbalance the fall in savings, which means demand may remain steady.
We anticipate some normalization in the availability of goods in the second half of 2022 due to improvements in shipping. In fact, the cost to move containers is starting to fall slightly. Furthermore, although U.S. labor markets remain tight, health disruptions may be less of a factor.
However, labor in the transport sector and inventory levels remain low. So, the availability of goods will likely remain suppressed throughout the first half of 2022, which could feed through via continued higher prices of goods, such as inflation. Meanwhile, the automobile industry will likely remain sticky as semiconductor shortages could persist well into 2023. Accordingly, autos could remain a leading factor in inflation readings going forward.
La información proporcionada en estos materiales brinda información general y de asesoría. It shall not be considered legal or medical advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of April 2022.