Supply Chain Disruption and the Impact on Small Businesses

The US economy is experiencing a lot of volatility these days. With the passing of the first year of the global pandemic, the economy has bounced back, adding over 500,000 jobs per month on average since the beginning of 2021. Consumers and small businesses are spending capital that they had built up during 2020 when they were receiving subsidies from the federal government and didn’t have much reason or opportunity to spend at the time. Despite extremely tight inventories, auto and home sales reached their highest levels since the bubble years of the mid 2000’s.

Rapid economic expansion is a good thing, given the precipitous economic plummet during the first few months of lockdown. However, some sectors contracted significantly, such as the hospitality sector. The demand for workers has expanded, as has the demand for energy, raw materials, and manufactured goods. As a result, many businesses are experiencing labor and material shortages and low to no inventory. Companies with supply chains that depend on overseas materials and products have been hit especially hard.

Today, supply chain constriction is a significant problem. Many experts believe these disruptions are temporary and should begin to untangle themselves by the first quarter of 2022. However that is a long enough period of time to at least partially suppress the rapid economic expansion that was just getting started. With the slowing of vaccination rates, and the rapid spread of the COVID Delta variant among the unvaccinated, the specter of a significant 4th wave of the pandemic has added yet another unpredictable variable to the supply chain conundrum.

Where are the Supply Chain Disruptions?

In March of this year, inventory-to-sales ratios bottomed out. This ratio shows how many days of typical sales it would take to deplete current supplies of materials and goods. As business activity recovered, demand for these materials and goods increased much faster than inventories could replenish themselves, causing the inventory-to-sales ratios to nearly bottom out.

These shortages are beginning to impact businesses in many industries. Construction companies are reporting shortages of drywall, shingles, and lumber. As a result, projects are taking longer to complete, and the increased costs are being passed on to homebuyers. Monthly housing starts have been volatile as a result, reflecting the ongoing shortages of building materials.

Shortages are also impacting the auto market. The supply chains for car manufacturing are some of the most complex processes in all of manufacturing. The semi-conductor “chip” shortage has hamstrung auto makers who have acres upon acres of cars sitting waiting for chips. This shortage of new cars has also driven the price of used cars up by double-digits.

What About Inflation?

Supply-chain disruptions are also driving up consumer prices. Recent increases in prices and core inflation are attributed mostly to low supply and high demand (which leads to higher prices) for new and used cars.

Certain commodities like coffee and toilet paper have experienced swings in supply and price as a result of the pandemic. In particular, toilet paper experienced a huge increase in demand of nearly 50% as a result of the lockdown and stay at home orders in early-to-mid 2020. This increase in demand was for consumer-grade toilet paper, not the scratchier type of toilet paper used by businesses and institutions. Most retailers only had about two weeks of inventory on hand which was not nearly enough to meet the rapid and huge increase in demand. Consumers, afraid they would not have enough toilet paper to last during the pandemic lock down, cleaned out retailer supplies.

So how did paper manufacturers rectify the supply problems? Toilet paper manufacturing is a very specialized and capital-intensive process requiring huge and expensive machines. There was no time to build more machines and add production lines. So manufacturers simply ran their machines around the clock at full-capacity to meet the demand. Some lines were converted from industrial-grade toilet paper to consumer-grade. This response from paper manufacturers led to a relatively short-lived toilet paper shortage. This type of flexibility by manufacturers in the early stages of the pandemic led to a period of relative supply stability during the summer of 2020.

Will Supply Chain Disruptions and Inflation Persist?

Despite record low inventories and manufactured goods delivery times at all-time highs, there is reason to believe that these shortages will be temporary. Surveys of manufacturers show long delivery times for the next 60-90 days, but future delivery times are in their pre-shortage time frames. This also bodes well for inflation, which is also believed to be transient and returning to normal levels sometime in Q1 of 2022.

The federal government recently released a report on a 100-day review of supply chains in four critical areas: Pharmaceuticals and their ingredients, electric vehicle batteries, semiconductors, and critical minerals such are rare earth minerals used in semi-conductor manufacturing. This report, in conjunction with the newly established Supply Chain Disruptions Task Force, will allow for close cooperation between government agencies and industry stakeholders to address current conditions, and to develop short-term action plans to insure the rapid restoration of normal supply chain and market conditions.

One important vulnerability that was revealed as a result of these supply-chain disruptions is the idea that growing our domestic manufacturing base could be an important hedge against future supply-chain problems. Our ports are still very congested, shipping containers are in short supply, and the cost of international air freight has increased sharply. Having a more robust domestic manufacturing capability could play a key role in the eventual recovery from the economic damage done by the COVID pandemic, and could be critical in establishing future economic growth and stability.

Back to Normal…Next Year?

Restoring normal economic conditions during and after a global pandemic is a complicated process and is very much uncharted territory. Thousands of businesses will have to re-open and re-establish normal operations, millions of workers who lost their jobs will need to be re-hired, and manufacturers will have to crank up their factories and production lines again. New infrastructure must be built, and new industries will have to be established. This will take time. By all accounts, the world and the world economy should be back to normal by this time next year.

September 13th 2021