The strength of the supply chain in the United States showed significant improvement for a second straight month in December after reaching a two-decade low in October, according to the newest data from the RSM US Supply Chain Index.
The index rose 24% on the month to 3.12 standard deviations below long-term normal conditions, implying that while conditions are improving they are still far from neutral.
The December reading was the best since March, driven by sharp improvements in delivery times, prices paid and retail inventories—as reflected in data from the Institute for Supply Management—despite deterioration in intermodal freight traffic.
Given that the spread of the omicron variant has become a large part of global economic risk, one cannot convincingly make a call that the index has bottomed.
The rapid spread of the coronavirus in the second half of December continued into January—and that will almost certainly slow the improvement in supply chain bottlenecks.
So even though we think that the worst of the disruptions may be behind us, choppy seas remain.
The omicron variant is working its way through global manufacturing centers, especially in countries like China, where a zero-COVID policy is strictly enforced and economic restrictions are imposed.
It would be of little surprise if the index reflects greater stress as export platforms the variant leads to restrictions in the Far East. It will most likely be the second half of the year before meaningful improvement in supply chain stress takes place.
At the same time, local manufacturers and multinational businesses are better prepared than before the pandemic to address such disruptions, helping to ease such strains.
Perhaps just as important, higher global vaccination rates will help to temper the impact of the omicron variant than with the delta and previous variants.
There is still much room for improvement in the coming months, following disappointing data in December for the inventory-to-sales ratio, freight traffic, job vacancies and industrial capacity utilization.
The takeaway
Unlike demand, fixing supply deficiency often takes much longer, especially with a global supply chain that has become highly interconnected.
Moreover, economic toolkits that include fiscal and monetary policy that are normally used to address lagging demand are much less effective in the short run to address the supply side issues.
But once the bottlenecks start to ease, the power of market efficiency and business innovation will help the economy bounce back more quickly.
