This article is provided by ITR Economics in partnership with IMEC.

Supply chain woes have been a persistent thorn in the sides of businesses and consumers alike. Macroeconomic fundamentals point to easing supply chain disruptions in 2022­–23. This likelihood is due to expected rise in industrial output in conjunction with ebbing demand as economic growth slows and the effects of stimulus fade.

We acknowledge that 2022 has not been without its own black swans, ranging from the lockdowns in China stemming from the country’s zero-COVID policy to the international conflict in Ukraine and the attendant sanctions on Russia. However, despite these events, we have indeed begun to see easing in aggregate supply chain pressures: the Global Supply Chain Pressure Index – which is compiled by the Federal Reserve Bank of New York – is generally declining from a tentative December 2021 high.

For those of you who are shouting “But I’m not seeing improvement!” – we understand. While the Pressure Index is starting to come down, it is still at a very high level, and some industries are facing more acute shortages than others. Nonetheless, the aggregate movement toward more normal conditions is encouraging.

To better examine the forces influencing continued disruption, it is useful to separate material shortages from labor shortages.

Material Shortages

Material shortages were the original culprit of supply chain disruptions. When the pandemic shuttered businesses and forced workers to stay at home, companies slashed production, preparing for the worst. Instead, massive fiscal and monetary stimulus measures created demand for goods sourced both domestically and from abroad. Sanctions on Russia and the war in Ukraine have limited sources for some raw materials and commodities, especially crude oil. However, other commodities – such as lumber, amid softening demand for homebuilding – have declined in price. As the US economy continues to cool over the course of 2022 and 2023, we are likely to see more of this.

While material shortages abate, though, the other component of the supply chain is likely to prove a more persistent pain point.

Labor Shortages

The second culprit of supply chain disruptions is a shortage of workers. Workers are needed not only to create goods, but also to transport them, unload them, stock shelves, etc. A shortage of workers or breakdown in any of these steps can have a domino effect. For example, we are closely watching negotiations involving the International Longshore and Warehouse Union, which represents dockworkers along the US West Coast, including the ports of Los Angeles and Long Beach. A breakdown in these talks could have a knock-on effect on domestic supply chains given the large container throughput of West Coast ports. In prior content, we’ve discussed the shortage of warehousing and trucking workers. However, labor shortages extend well beyond the logistics industry. US Nonfarm Job Openings were at nearly 12 million in April, a record high and 22% above the April 2021 level. On a seasonally adjusted basis, this equates to two job openings for every unemployed person.

Takeaways

The bottom line: while slowing economic growth and increasing industrial output will help ease the supply chain quagmire, the severity of the labor shortage means we are still likely to see some supply chain problems (and resulting elevated inflation relative to 2010s norms) in the years ahead.

How can you combat the challenges posed by supply chains, inflation, and labor? Consider which of the following are appropriate for your business, and brainstorm other ideas with your exec team:

1. Ensure your management team is devoting sufficient bandwidth to tackling supply chain challenges.
2. Seek out secondary and tertiary sources to reduce your supply chain risk.
3. Sharpen your competitive advantage to better position your firm to pass along costs to customers.
4. Leverage negative real interest rates to invest in automation or software that will reduce your need to hire or help your existing workers be more efficient.
5. Focus not only on pay, but also on the other factors (great managers, strong company culture, clearly defined career paths, etc.) that will keep your workers at your firm.

Finally, don’t give in to pessimism on these issues. Making strides in these areas is a true competitive advantage in this cycle.