The way many of us learn about how the things we own work is when they stop working. Like your toaster. Or maybe your car. And in the year 2022, we all started to learn about global supply chains for the same reason. Because for an astonishingly broad array of goods and components, they struggled to keep up with demand. Getting a promise to deliver instead of an actual delivery has become all too common for businesses and consumers alike.
To sort out why, we first need to understand a little bit about the workings of the systems that stock our shelves and get all the pieces and parts of what ultimately become the things we buy and use. The first thing to know is that the systems are global. There is a Montana supply chain, perhaps. But it is embedded in a single, global system that moves components, raw materials and finished goods all over the world, with a large fraction of that volume involving Asian producers.
We also have evolved in a direction that often sources items from a single region, a single country or even a single factory. One reason why inflation has been so dormant for decades until recently is the relentless, downward pressure on goods prices from efficient, low-cost competition from suppliers in other countries, who gained efficiencies and market share from their specialization.
Finally, the systems are lean. Another cost savings has come from routine operations with very thin inventories. Tight networks of supply that are coordinated with sophisticated processes that pass information up and down the chain – relying on air, ground and ship-based transportation – have evolved to service the fluctuations in demand.
So why did the system break down? In some ways, it didn’t. Lost in the attention paid to empty toilet paper shelves and car dealer showrooms is the less newsworthy story that for the vast majority of goods, supply chains have continued to work. But there is no question that for many kinds of things, the system choked.
The most important reason for the breakdown has been the huge spike in demand. In fact, this may be the only reason that matters. In October 2021, durable goods demand in the national economy was 40% higher than in October 2019, when stories of pandemics were still in history books. Stimulus-fueled spending tilted towards goods and away from services, many of which were still impacted by COVID fears and restrictions. RV sales were roaring, but hair salons and cruise ships were empty.
Magnifying the impact of demand was the fact that it was not forecasted. The stunning decline in the economy in the spring of 2020 caused many businesses to plan for a longer, more painful recession than actually happened. They canceled orders and laid off people, leaving them flat-footed when the quick snapback of spending arrived. They all sought to replenish and re-hire at once.
Of course, the list of other contributing factors to the supply disruptions is a long one. The COVID-related lockdowns in China, the withdrawal of air cargo capacity as international air travel cratered and the labor shortages in logistics industries stand out.
So the question now becomes, what happens next? That’s exactly what we’ll tackle in our Economic Update programs taking place around the state in August. The bottom line is that supply chains are now recovering.
But some of the good news for supply chains is the result of news that is not so good for the overall economy. Shortages of goods have pushed up prices, which throttles back demand. The economy is returning to a more normal spending mix between goods and services. And slowing economic growth gives breathing space to overtaxed supply networks. But healing is often slow to arrive. We are still feeling the impacts of disruptive events that happened three or four months ago.
How will supply chains change and evolve after this experience? Will we start “re-shoring” to bring manufacturing closer to home? For some critical items, such as those related to national security or pandemic preparedness, this is quite possible. But for the entire range of business and consumer goods, the forces of competition are likely to push us in the direction we were already going, with planes, trains and ships moving all over the globe.
Patrick Barkey is director the Bureau of Business and Economic Research at the University of Montana. For more information on BBER’s economic update programs, visit www.EconomicOutlookSeminar.com/Economic-Update.
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