- Businesses have failed to respond to consumer demand this year. This has caused the prices to skyrocket.
- Recent US manufacturing indicators show that supply is starting to match Americans’ spending.
- Bottlenecks at ports are also easing, hinting that the supply crisis that lasted for months is finally over.
The supply chain crisis finally appears to be reversing. Call it this year’s Christmas miracle.
The last months of 2021 have been mixed for the US recovery. Spending has remained strong and the unemployment rate has fallen closer to pre-pandemic levels. Yet a historic imbalance between demand from Americans and supply from businesses has reduced optimism for a full economic recovery. People were spending big as the holidays approached, but shipping bottlenecks and commodity shortages stood in the way.
Now, new data suggests that the worst of the supply mess is over and the gap between supply and demand is starting to narrow. New sales by US manufacturers grew at the slowest pace in 11 months in November, IHS Markit said on Wednesday. Production, meanwhile, accelerated from the October pace. After months of supply disruptions and “out of stock” warnings, the November survey suggests a rebound in stocks.
A popular leading indicator of business activity suggests that the trend will continue through 2022. The Chicago Business Barometer from the Institute for Supply Management has shown that inventories – how much product companies hold in reserve – have reached their highest level since 2018 in November, with some companies reporting stockpiling to counter supply chain issues. Order books slipped 6 points below the 12-month average and new orders fell to their lowest level since February.
Simply put, manufacturers are picking up the pace and companies are ordering less from factories. This data joins the signs of easing bottlenecks in the mess of the global supply chain. Transportation issues “were still the biggest constraint in supply chains” last month, but congestion and shipping costs have improved from October levels, said Oren Klatchkin, an economist in October. chief at Oxford Economics, in a Monday note.
If manufacturing survey trends hold true, the United States could see a surge in supply hitting stores in a few months. It could be the silver bullet to end inflation in the age of the pandemic. An influx of inventory could slow new orders from factories as companies will want to offload inventory before buying more goods. A sudden increase in supply would also dissolve the tensions that were driving companies to raise prices. With shelves replenished, companies reducing their orders, and ports dealing with arrears, the upward price forces would likely fade.
The pivot also bodes well for the general economic recovery. Goldman Sachs economists raised their forecast for fourth-quarter economic growth to 6.5% from 6% on Saturday, citing stronger stocks and “progress towards decongesting ports.”
Of course, several risks could derail the recovery. The Omicron variant raises fears of further blockages and could cause manufacturers to cut production. And as congestion at ports improves, there are still around 70 cargo ships waiting off the coast of California that need to be addressed.
Yet the latest signals are serving as light at the end of the tunnel for businesses and consumers. Widespread shortages turn into surpluses, and Americans may soon see more discounts and sales than inflation-linked price hikes.