Issue #24: Supply Chain Issues, Energy Shortages, and Commodities
Supply Chain Issues
The COVID-19 pandemic has no doubt disrupted global supply chains to a significant degree. Given the physical nature of supply chain and logistics business models, they are unable to seamlessly transition to remote functions and operations like other service-oriented firms have. With the general restructuring of daily life due to the prolonging of additional public health restrictions, supply chain and logistics firms have been stressed in their attempts to simultaneously deal with an above average demand for goods and with new (local, regional, national, and international) regulations regarding masks, vaccinations, social distancing, and travel.
Over the past few decades of modernization and globalization, supply chains have become increasingly complex, due to the increasing technological specificity and sophistication of everyday household products, as well as efficient, due to the development of the “just-in-time” (JIT) manufacturing and inventory management system, popularized by Toyota in the 1970s and Dell in the 1990s.1 Obviously, China has played a large part in this ongoing story, as it has become the largest trading nation on the planet, with over $4 trillion in gross trade flows, in just 20 short years.
During the COVID-19 pandemic, rolling waves of government-imposed lockdowns and requirements/restrictions inhibited smooth passage of people and goods through airports, seaports, and ground crossings, which naturally resulted in increased transportation costs and delayed delivery times. Meanwhile, during the worst parts of the lockdowns, consumption patterns temporarily shifted, as consumers, now unable to spend on services, redirected spending towards durable and non-durable goods.
Moreover, flush with cash from government relief and stimulus packages, consumers in developed markets, particularly the United States, went on a (online) shopping spree. However, it seems that the upward trend in personal income growth has moderated after a reduction in government transfer receipts, and durable and non-durable goods orders have similarly mean-reverted as well. This suggests that there has not been a more permanent outward shift in the demand function of consumers, and absent an increase in wages and salaries that would boost personal income, any inflation seen in the durable and non-durable goods sector would only be transitory.
The figure below shows how personal durable goods consumption, one of the main drivers of shipping rates, appears to be moderating and mean-reverting back to its usual trend after a temporary above trend spike.
The figure below shows real personal income levels, both including and excluding government transfer receipts (i.e. unemployment benefits, stimulus checks, and other government transfer payments and social safety net programs). With the assumption that labor shortages are an actual problem and not simply media paranoia, it appears that they are not showing up and manifesting as wage pressures, which reduces the likelihood that current consumption patterns can continue.
