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About the author: Nathan Sheets is global chief economist at Citi Research.
Global supply chain disruptions have cascaded with surprising speed and power to countries around the world. Over the past year, the global auto sector has particularly felt the blow. With producers unable to get the semiconductors needed for new vehicles, dealer inventories have fallen to historically low levels. This, in turn, has sent the price of both new and used cars spiraling upward.
And autos have not been alone. The evidence of these challenges is almost everywhere: goods out of stock, furniture and appliances that require months for delivery, and mounting signs of overall inflation, which are starting to pinch into workers’ real wages.
The macro implications are first-order. Shortages and shipping delays threaten to continue to drive up prices. In parallel, production challenges and the reduced availability of goods threaten to hold back real spending. People can’t buy goods that aren’t produced or can’t be shipped. The resolution of these novel challenges will be a critical factor shaping the economy’s performance during the year ahead. They bear the imprint of the pandemic but have also taken on a life of their own.
With this in mind, my colleagues at Citi and I recently concluded a deep-dive examination of these developments. One notable finding is that we see surprisingly varied effects around the globe. In the United States, the demand for goods has been especially robust through the pandemic. The economy has felt the pressures associated with supply-chain disruptions, while it also has been buoyed by demand. Thus, the prices of goods have risen with particular vigor (reflecting both the vigor of demand and disruptions in supply). But spending and output have remained strong.
Europe in contrast is mainly feeling a pinch in supply, with aggregate demand less exuberant than in the United States. The result has been a marked increase in prices and a reduction in real wages, which has trimmed household purchasing power.
In emerging Asia, exporting firms have been unable to produce and sell the same quantum of goods as before, and excess supplies have in some cases been sold in local markets. The result has been wider output gaps and downward pressure on core domestic prices. Many emerging markets outside of Asia, however, have struggled with the inflationary effects of the shock, and the central banks have been pushed into defensive rate hikes to protect their credibility.
Our diagnosis is that the recovery from the pandemic—and the actions taken to support the economy—have led to a situation where the global demand for goods has run well ahead of their supply. Ordering a product is now as easy as “point and click.” But producing that product requires setting production schedules, finding suppliers, locating workers, and much more—all of which requires real time. The resulting supply-chain disruptions are, at least in part, the result of firms desperately trying to catch up.
Our work also sheds light on the eventual unwinding of these challenges and the path back to “normal.” First, by our reckoning, supply-chain pressures, while still intense, have stopped getting worse and might be showing signs of easing. Notably, container shipping costs from China to the U.S. West Coast have retreated 30% from their fall peaks, and the number of containers sitting idly at the Port of Los Angeles is down 40% since early November. In tandem, surveys of U.S. manufacturing firms point to a moderation in supplier delivery times and backlogs. Nevertheless, these indications are still preliminary. Such data similarly appeared to be stabilizing, or even improving, early last summer but then deteriorated sharply with the onset of the Delta variant.
Second, as a related matter, a sustained improvement will require further progress toward containing the virus. The economic stresses that have flowed from multiple waves of lockdowns and re-openings have contributed critically to the tensions. The global inventory system was not designed to absorb highly uneven stops and starts in demand and production. For this reason, we see the ongoing global vaccination campaign as a critical contributor to an easing of supply-chain pressures, but the ongoing battle with the Omicron variant highlights that the challenges remain acute.
Third, different aspects of the stresses are likely to resolve at differing rates. That said, a critical mass of supportive factors will likely have emerged by the spring. By then, we are likely to see an easing of seasonal demand, an improving energy-price picture, and progress toward unclogging the ports. But we doubt the situation will be fully resolved until well into 2022 or, perhaps, even thereafter.
Bottom line, we see notable, albeit gradual, improvements to supply-chain disruptions going forward. Even so, if we have learned anything from the twists and turns of the past few years, it’s that the path back to “normal” is likely to be challenging and yet hold further surprises.
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