Sec. Buttigieg: Port improvements saved Christmas
US Transportation Secretary Pete Buttigieg visited the Ports of Los Angeles and Long Beach Tuesday, highlighting actions a supply chain task force have taken to try to help speed up the movement of goods at the ports. (Jan. 11)
AP
- Strong consumer demand is the main reason for supply snarls.
- Some experts still think the supply system is the bigger problem, though.
- But if demand is the problem, Fed rate hikes may help.
Supply chain bottlenecks that are disrupting deliveries to shoppers and businesses –while driving inflation to 40-year highs — mostly have been traced to pandemic-driven worker shortages at factories, ports and warehouses.
But some top analysts say there’s a bigger culprit: You.
Soaring consumer demand —for TVs, sofas, appliances and much more — is the predominant force behind the supply snarls rather than kinks in the global delivery network, these experts say.
“The main culprit is demand,” says Yossi Sheffi, director of the MIT Center for Transportation and Logistics.
The analysts agree, of course, that both hobbled supply chains and surging demand during the pandemic have contributed to the delivery troubles and product shortages. And the two factors are closely intertwined. Strong demand can strain even robust production and transportation systems, making them appear frail, and weak supply chains can be overwhelmed by even a normal level of household purchases.
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What are the major supply chain issues?
“It’s not easy to completely disentangle,” says Gianluca Benigno, assistant vice president and a top official in international research for the Federal Reserve Bank of New York.
But the question of which — supply or demand —is mostly behind the snarls could determine how quickly they’re resolved.
For example, economists have said Federal Reserve interest rate hikes can fight inflation by dampening demand but will do little to repair ailing supply chains.
But if the supply kinks themselves are mostly caused by strong demand, “The Fed can solve the problem” by lifting rates, says Mark Zandi, chief economist of Moody’s Analytics. The central bank increases rates to cub borrowing, temper an overheated economy and fend off inflation spikes
Last week, the Fed raised its key interest rate for the first time in more than three years and forecast six more quarter-point hikes this year.
Zandi, however, believes the supply system itself is the bigger constraint. That, he says, could take longer to fix if the U.S. and other nations continue to be buffeted by COVID waves.
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Are supply chain pressures easing?
Supply chain stress has shown some signs of abating in recent months, notwithstanding Russia’s invasion of Ukraine, which is expected to worsen some of the bottlenecks.
The number of ships waiting to unload cargo within 40 miles of the ports of Los Angeles and Long Beach has declined to about 30 from more than 80 last fall, according to Oxford Economics.
But delivery times from Asian factories to West Coast ports continue to hover at about 110 days, up from 40 to 50 days before the pandemic, according to Flexport, a company that arranges shipments.
MIT’s Sheffi says such measures don’t necessarily reflect a feeble supply chain and can be elevated because of spikes in orders that are clogging the system.
After the pandemic shut down much of the in-person economy in early 2020, Americans hunkered down at home and began ordering everything from new TVs and tablets to gym equipment. Meanwhile, factories, warehouses and trucking companies grappled with staffing shortages as employees stayed home out of COVID fears or to take care of kids who were distance learning.
How strong is consumer demand?
Since March 2021, consumer purchases of long-lasting goods such as washing machines and cars have hovered 30% to 40% above pre-pandemic levels, according to the Commerce Department and Federal Reserve Bank of St. Louis. And $2.8 trillion in goods were imported to the U.S. last year, 13.5% above 2019 levels, Census Bureau figures show.
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The supply chain has little wiggle room and “wasn’t designed to handle a (20% to 50%) surge in demand,” says Phil Levy, Flexport’s chief economist. “It can just barely handle the peak season.”
Yet those goods were purchased and delivered, even if they didn’t always arrive on time – proof, he says, that the shipping network functioned as best it could under the circumstances.
Outsized customer demand, he says, is the problem.
“You have an overwhelmed supply chain…that hasn’t been able to catch up,” Levy says.
Is there another shortage of toilet paper?
The sky-high demand was intensified by sharp swings, such as periodic toilet paper and other product shortages that largely traced the ups and downs of the pandemic, says Andrea Sordi, a clinical assistant professor in supply chain management at the University of Tennessee.
“We wouldn’t have been able to cope with that spike” even with a normally functioning supply chain, he says. “It’s difficult for (manufacturers and retailers) to plan.”
Sordi acknowledges that worker absences in the supply network have been part of the problem. But, he adds, “If you kept demand flat, we probably could have coped with that without much noise.”
The smoking gun for consumer demand as the main culprit is that bottlenecks didn’t emerge as a significant hurdle until spring of 2021, says Sheffi of MIT’s Center for Transportation and Logistics. That was after the federal government had juiced spending by sending three rounds of stimulus checks to most households.
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“They flooded the market with money,” he says.
Oxford’s supply chain stress index was elevated during parts of 2020 but moved sharply higher in March 2021.
It’s the supply chain’s fault
Others point a finger mostly at the supply chain. Zandi says Moody’s supply stress index worsened last September as COVID’s delta wave sparked more worker absences even as the annual rise in retail sales softened.
And the New York Fed’s global supply chain pressures index began spiking in spring 2021 even though Fed officials have tried to exclude the effects of higher consumer demand.
Morris Cohen, Panasonic professor of manufacturing and logistics at the Wharton School, refuses to place most of the blame on either supply or demand.
“You have a demand shock and a supply disruption,” he said. “They acted together.”
Ultimately, Sordi says, the solution is for companies to expand limited supply networks and set up backup plans in case some suppliers or delivery routes aren’t available.
Yet that presents shippers with another dilemma. If they build out their networks to meet stronger sales, “Will (the demand) last?” as the pandemic wanes and consumers return to buying more services, like dining out and traveling, Levy asks.
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