Estimates of logistics data in the RSM US Supply Chain Index, as seen in the index’s Nowcast, point to improved conditions in the U.S. supply chain heading into the end of the year.
The demand-pull inflation—rising pricing pressure spurred by a shortage of supplies—that has altered at the Federal Reserve and global central banks has not yet eased sufficiently to create the conditions for a decisive turn upward in our supply chain index.
It is too early to categorically state that disruptions to supply chains have bottomed despite a potentially constructive turn inside the index amid what has turned into a multiyear crisis.
Our composite index remains underwater at more than four standard deviations below normal conditions and the real economy, while booming, is still operating under subpar conditions with respect to the supply side.
Delivery times remain lengthy, retail inventories are still low and prices continue to rise.
Delivery times remain lengthy, retail inventories are still low and prices continue to rise. Logistics have not yet caught up with demand, although producers appear to be seeking workarounds and alternate sources for intermediate goods.
And despite improvements in the labor market, there are persistent reports of shortfalls of qualified workers, which is a long-term concern.
We recently updated the index by adding data on capacity utilization from the Federal Reserve, which helps to better capture the impact of the pandemic on production constraints.
During the first several months of the pandemic, as mass layoffs and the economic shutdown forced thousands of factories to be closed, production capacity plunged to below 65%, a record low.
Although the economy has reopened on a broader scale, the just-in-time supply chains that involve millions of moving parts cannot be switched back on to their pre-pandemic level in a couple of months.
The good news is this: After one month of decline to 75.2% in September because of Hurricane Ida and the impact of the delta variant’s surge, production capacity increased in back-to-back months to 76.8% in November—above the level of capacity in December 2019, before the pandemic.
Overall, we hope that October will turn out to be the bottom of this downturn in logistics issues. But we would not be ready to declare victory until the index moves above its downtrend and begins to approach normal levels of activity.
After the 2001 dot.com recession, it took 12 months for the index to move from its low point to normal levels of activity. And it took 10 months after the 2008-09 financial crisis for the supply chain to fully recover.
That pattern indicates a supply chain not prepared for the rush of demand after the severe drops in activity—the kind that now occur every 10 years—and suggests the need for public and private investment in its infrastructure if we are to expect a more rapid return to sustained economic growth.
