Stress in the U.S. supply chain increased in January as the omicron surge temporarily put some parts of overall production to a halt.
While we still expect stress on U.S. and global supply chains to improve this year, geopolitical tensions associated with the imminent Russian incursion into Ukraine carries the possibility of a significant disruption of global oil and natural gas supplies, placing further stress on supply chains.
After sharp back-to-back increases in November and December from the historic low in October, the RSM US Supply Chain Index inched down to 3.53 standard deviations below neutral in January. December’s reading was revised downwardly to 3.31 below neutral.
Improvements in retail and service inventories were offset by longer delivery times, lower wholesale and manufacturing inventories, and heavier freight traffic on the month. On top of that, high inflation stretched the producer prices paid component of the index, which declined after two consecutive months of increases.
Still, the modest slowdown in supply chain improvement was a somewhat encouraging sign as many had expected a much more severe turn of events in the wake of the omicron variant’s surge.
Barring a new COVID-19-related distortion, we should expect the underlying gains to continue in the coming months as most of the supply barriers are lifted.
While the imminent interest rate hikes won’t help much to strengthen supply chain linkages, they will help to alleviate some of the relative demand pressure that has caused the inventory components of the index to deteriorate quickly.