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Supply Chain Issues and What To Do

November 19, 2021

When will supply chain challenges start to ease, and how can your business tackle these challenges now? Catch our newest TrendsTalk episode with ITR Economist and Speaker Lauren Saidel-Baker to learn more.



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Transcript by Rev

Hi, I'm Lauren Saidel-Baker. And thank you so much for joining me for today's episode of ITR Economics TrendsTalk. Today, let's talk supply chain. This is one of the big ones, the most crucial issues facing businesses today. So let's see how we got here to this very unusual situation and critically, what do we see in the future? When do we see the supply chain problems easing, and more importantly, what can you do about them?

Well, I want to start with how we got here. I'm an economist. So I very firmly believe that everything comes back to two critical factors, supply and demand. We take those two lines, we graph them. We find that crossing point and that's our equilibrium. So we are going to break down these supply chains constraints in terms of supply and demand, but I really would argue to you that well, both have their flaws and their contribution to the problem.

This is primarily a demand story. Supply, there could be more. And I know we hear that in the headlines. We see all of those great aerial shots, right, of the port of LA and the ships just queued outside the harbor waiting for now more than two weeks to get into the port, to find a slip and get unloaded. Well, that is true. And we do have all of those extra ships. It's not necessarily on the supply from the port.

And I know it's hard because we hear all of these narratives, right? The port either isn't fully reopened or maybe it's that not everyone came back to work at the port after the pandemic. But actually, if we look at the data, we can find that of the top five busiest port in the US, all of them are currently operating at higher activity levels, putting more volume through the ports than they have been back in 2018 and 2019, at those so-called normal levels that it seems like we're just trying to get back to.

So it isn't so much a supply problem. Yes. More supply, more availability, maybe keeping the ports open 24 hours a day, or investing in additional capacity, that could help. Well, it couldn't hurt. But the ports are just one link in that great supply chain. You can't just strengthen one link and strengthen the whole chain.

Really the story to me is the demand side. Even at these higher volume levels, going through the ports, we still have so much demand. That demand picture is so overwhelming that even being busier than the ports have ever been, we still have those ships waiting offshore. We still have more stuff trying to get wherever it's trying to go. So it's a bit of a more nuanced situation.

And again, this is a positive problem, right? Part of the issue is just the demand came surging back so strongly in the wake of this last recession. We have so much more activity now. Our consumer is on very stable financial footing. We have that ability to go out and spend and buy things and well, then we need to move those things. So this is in a way, a very positive place to be. That said, it is still a constraint. And these supply chain issues are still with us and to potentially limiting a bit of the upside. But I really want to keep this in context. We're not seeing downside. We're seeing more limited upside as a result of these supply chain constraints.

So where do we go from here? Well, if you've been following our forecast, ITR Economics, you probably know that we expect that peak growth rate across the macro economy, that highest rate of change, to occur early next year. So by mid 2022, we think growth will still be positive, not calling for a recession, but we think that those rates of change are going to start to come down. They're going to start to normalize. Now when that happens, I know we all see phase C, the slowing growth trend does a little bit of a red or a yellow flag, let's say. An orange flag, cautionary. We exercise caution during phase C.

But it's not necessarily a bad thing. We do not think this cycle will be recessionary. So look for those lower more normal growth rates, maybe more manageable growth rates is a better way to put it. Look for a little bit of relief there. We'll get to start to work through the log jam. I'm not saying that everything will be fixed by 2022, but we should be moving in that direction. At least things aren't getting materially worse.

So that's the big picture. 2022 should bring at least directionally a little bit of relief as that demand side, that overarching issue that's really been driving these trends, starts to ease up. We're not getting worse and we might even start to get better.

Now, there are some longer term trends that could really affect this outlook. The first one is nearshoring. We've been talking about this at ITR for a very long time. Those typical trade relationships, while we're starting to see them change. Production isn't leaving the US anymore. In fact, it's turned around and it's starting to come back and maybe not to the US exactly, but we're seeing a lot of production trying to get closer to its end use market. Maybe that's Canada, maybe that's Mexico, somewhere very close. Maybe you'll have some cost gains in one jurisdiction or in another, but overall the end result is that you're moving largely out of Asia, back to somewhere a little bit closer to your demand source.

That's been an ongoing trend and the pandemic really has accelerated that trend. If anything, all of these companies that saw their supply coming out of Asia, they were very shocked when they couldn't get what they needed. Maybe these were second or third tier suppliers that they didn't even know where that end production was happening. So many firms were blindsided and a lot of people said during the pandemic, I don't want this to happen again. I want to be ready for the next time. Whatever that next thing is, that next black swan event that we don't see coming, I want my production to be more stable. I want to know that I can get what I need, even if that is at a slightly higher cost basis.

So that nearshoring, bringing things back closer to our market, is necessarily causing changes across the supply chain. In the near term, it's disruption, right? I'll use semiconductors as the example. It takes a long time to build a semiconductor plant. So even though we are moving that production back to the US, it's not going to be an immediate fix in the next year or two. It's just going to take a little bit longer before that production is really up and running. So this is a maybe medium to longer term trend.

Another longer term bit of relief that we might I see is investment from that infrastructure bill that just recently passed. Now, many politicians would tell you that this could solve everything tomorrow, or at least by the end of the year. Well, I don't see that happening so much. Firstly, because it will just take some time before that spending gets where it's going, before all of those I popping dollar amounts can really be invest, can really be spent and turned into construction activity. And finally, even once they do reach some construction activity, all of that investment in ports, in airports, in roads and bridges, that's going to smooth out these supply chain disruptions. Well, it takes a lot of time. If anyone has ever lived through a construction project on the road near their house, you notice it takes much longer than you think before that project is completed and before we're seeing the benefits, reaping those rewards. So I do see the infrastructure bill as being a long term upside, but I really want to emphasize that first point, a longer term upside.

In the near term, evaluate your relationships, because the supply chain looks much different today than it did a couple years ago and probably than it will a few years from now. But overall, I hope you have just a little bit of hope on the horizon. Things aren't getting worse and they might even be getting better. Stick with us and we'll tell you about it.

For this episode of ITR Economics TrendsTalk, I'm Lauren Saidel-Baker. Let's talk next time.


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