Supply chain disruptions and shortages have become a serious hardship for the global economy since the beginning of the Covid-19 pandemic. Moreover, assessing the severity of these issues has also presented a challenge for forecasters and policymakers, as most conventional measures focus on specific elements and disparate parts of the global supply chain.
In response, researchers at the New York Fed constructed a Global Supply Chain Pressure Index (GSCPI). The GSCPI combines two dozen supply chain measures with the goal of providing a more comprehensive view of the severity of supply chain disruptions. The metrics include global transportation costs from the Baltic Dry Index, airfreight costs from the BLS and several supply chain-related gauges from PMI data, focusing on manufacturing companies across the United Kingdom, the euro area, Japan, China, Taiwan, the U.S. ,and South Korea. The GSCPI measures the number of standard deviations from the average value. The larger the number of standard deviations the higher the supply chain pressures.
Movements in the GSCPI are highly correlated with goods and producer price inflation changes, implying clogged supply chains are an important driver of U.S. inflation today. The chart below shows that global supply chain pressures increased significantly when the pandemic first unfolded in March of 2020 and widespread business closures ensued. Pressures then moderated as business restrictions were eased over the summer and many businesses reopened, only to be followed by renewed pressures as governments across the globe tried to slow the spread of new COVID variants. Pressures dropped for three months earlier this year as Omicron waned, before increasing again in April on renewed China shutdowns and the outbreak of war in Europe. In short, supply chains remain far from normal and are seizing up once again.
Global Supply Chains Pressures Increased in April
Still, the better than expected industrial production data released this week gave one the impression that some progress is being made to replenish business inventories and help goods supply to catch up to robust demand. Auto production growth was especially strong over the last two months, increasing 8.3% and 3.9% respectively as dealers tried to replenish sparse inventories.
On the other hand, manufacturers' capacity utilization rate increased to 79.0%, the highest utilization rate since December 2018. The April reading was only slightly below the long-run average of 80.0% from January 1967 to April 2022. The recent upward trend in utilization rates points to U.S. factories that are now producing "flat-out". Additional production gains will become much more difficult from here without significant investments in new manufacturing capacity and a workforce willing to re-enter the manufacturing workforce. If goods demand doesn't turn down soon we are likely to see another serious wave of goods shortages, supply chain disruptions, and continued high price inflation.
Capacity Utilization At The Highest Since December 2018
The problem in a nutshell is that U.S. factories already firing on all cylinders are still bumping up against historically-lean inventories. Indeed, the inventory to sales ratio for all industries including manufacturing, retail and wholesale trade, which measures the months of inventory these companies have on shelves to support their current level of sales, was unchanged at a lean 1.27 months in March.
The Inventory/Sales Ratio Was Unchanged in March
The inventory-sales ratio is down significantly from the pandemic-high of 1.73 in April of 2020, and is now well-below the long-run average of 1.37 from January 1992. This nearly ensures already-stressed supply chains will remain under pressure for the foreseeable future.
Global supply chains remain under intense pressure and supply chain disruption are unlikely to ease much this year given the extremely volatile economic environment. Traffic jams at Chinese ports have increased dramatically due to the zero-COVID policy in China, and in the North Sea due to the war in Ukraine. While congestion at the large ports of L.A. and Long Beach improved noticeably in the first months of the year according to the Kiel Trade Indicator, pressure is expected to escalate again in the next few months due to the increasing number of cargo ships moored outside of Chinese ports, particularly in Shanghai.
U.S. manufacturers will need to continue producing as fast as they can just to keep up with slowing demand growth. We raised our industrial production growth forecast to 10.4% annualized for the second quarter in response to the robust April industrial production data. Over the medium-term, production growth is expected to remain firm throughout the year. We are still far away from a manufacturing recession here in the United States.
To learn more, check out this week's U.S. Outlook Report.