IN THE SPOTLIGHT

Supply Chain Disruptions Expected to Continue in 2022

Supply chain disruptions are still causing headaches in late 2021 — automakers have been forced to idle plants due to the semiconductor shortage, and containers are backing up at ports and holding up downstream production and consumption. While no one can predict a precise end date for these frustrations, economic data points to slowing growth in the US macroeconomy during 2022, which will help supply chains begin to catch up. However, the shortage of labor will continue to be a pain point, and the pandemic presents an unknown. 

The unique set of factors that drove up demand in 2021 will not be repeated next year. During the 2020 lockdowns, consumers paid down debts and built up savings as they were forced to delay consumption and got a financial boost from stimulus. US personal savings were at about $1.2 trillion in the fourth quarter of 2019 and quadrupled to $4.8 trillion in the second quarter of 2020. During 2021, consumers have drawn down much of these savings, fueling sky-high demand in recent quarters. Savings have now retreated to $1.7 trillion, still above the pre-pandemic level but with less excess for future consumption. 

Going into 2022, conditions are returning to more “normal” — the consumer is in a strong financial position, but without the abnormal savings and pent-up demand seen last year. At the same time, nearly all leading indicators are signaling business cycle decline next year. A more moderate rate of rise in consumer demand will help upstream supply chains catch up, and we should see shorter delivery times and less upward pressure on prices. Improvements in logistics capacity, such as increased hours and improved efficiencies, will begin to slowly add up. Expect gradual improvements in the supply chain issues as 2022 progresses, but be prepared for a persistently tight labor market. 

A Closer Look at

The US Economy: Where Have All the Workers Gone?

What you need to know: Take action to prepare for a tight labor market in coming years.

It’s well established that there have been myriad “positive problems” — raw material shortages, price spikes, transportation delays, labor shortages, etc. — during this business cycle. Some of these problems will be somewhat ameliorated next year by the combination of softening demand (foreshadowed by numerous declining macroeconomic indicators) and increasing supply (illustrated by rising utilization rates, capital equipment purchases, and construction starts), though the difficulties will not vanish entirely. Is there a positive problem you should be prepared to combat well into the future? According to certain analysts, there is. It’s the labor shortage. 

Your long-term business planning must address ways to work around the scarcity of workers for at least the next three years. To understand why, consider the list of factors contributing to the current worker shortage:

1. Health and safety concerns related to the pandemic
2. Scarce and expensive childcare
3. A mismatch between the skills workers possess and the skills employers need
4. Demographics 

The net result of these factors? US private sector employment is running well below the pre-pandemic level, while job openings surge to record highs, driving wages higher.

While the end of extended unemployment benefits could lead to some relief for employers, such benefits are clearly not the only issue impacting labor scarcity, nor are they likely the main issue. The massive Baby Boomer generation includes those between 57 and 75 years old. As more baby boomers retire, we will need younger workers to replace them, especially in these sectors which are already short on workers:

• Manufacturing: 892,000 openings in August, more than twice the August 2019 number
• Wholesale Trade: 263,000 openings in August, up nearly 50% from August 2019
• Construction: 365,000 openings in August, up about 5% from August 2019

Unfortunately, the baton pass is not occurring. Labor force participation among younger workers is severely depressed, and enrollment at two-year colleges — which tend to teach vocational skills that employers in the above sectors are seeking — is down almost 10% from a year ago.

What can you do to overcome these challenges? Offering higher wages, automating labor, and raising your prices to pay for these things can help. And if you’ve already done these things or you can’t afford to do more, there are other strategies that don’t involve financial outlays:

• Establish a new talent pipeline by partnering with local institutions that have historically produced your great workers.
• Create job postings that stand out from the crowd
• Focus on improving your management staff
• Support younger employee career advancement
• Ensure your workplace is dynamic, fun, and safe
• Ask your employees for anonymous feedback and be transparent about working to fix  issues

By considering the above, along with other ideas from your management team, you can ensure you are maximizing your business’s odds of success in what the data shows is likely to be a persistently tight labor market in coming years.

Reader’s Forum

My business is struggling to fulfill orders because we can’t get materials from suppliers. It’s hurting our bottom line as well as our reputation. When will these supply chain problems end?

The untangling of the supply chain is, and will continue to be, a slow and arduous process; there is no overnight fix. Shipping container throughput is already at record highs, and yet problems persist, due in no small part to the strength of demand. Businesses are continuing to take drastic steps to address supply chain problems. Major goods carriers, including UPS, FedEx, and Walmart, along with the largest ports on the west coast, have moved to 24/7 business models to address shipping logjams and port backlogs. As we move into 2022 and demand softens (as certain leading indicators suggest it will), we should see a gradual easing of supply chain disruptions. A complete resolution by mid-to-late next year is unlikely. To implement reshoring and other alternate supply chain strategies takes time — measured in years, not months.

MACROECONOMIC OUTLOOK

With the close of the third quarter of 2021, the media messaging on the state of the US economy is mixed. Concerns over the longevity of inflation, September’s stock market wobbles, and persistent supply chain shortages have caused jitters regarding the strength of the recovery. In recent weeks, energy prices have skyrocketed worldwide, with oil topping $80 per barrel and natural gas at Henry Hub breaking above $6 per million BTUs. Domestic oil and gas producers have been slow to invest in new production capabilities, and international players have been more measured in increasing supply than many had hoped.

So how do businesses cope with these issues, the mixed messaging, and the uncertainly wrought by the combination? Data-driven analysis suggests your business should prepare for the following potential scenario in 2022: 

• The US economy is poised for growth through 2022, supported by a consumer base with low credit card debt, elevated savings rates and abundant job opportunities
• Declines in indicators signal that the pace of growth will slow next year
• Leading indicator declines indicate an elevated risk of a stock market correction at some point in the coming quarters
• The combination of less-robust demand next year – as foreshadowed by leading indicators – and firms’ ramping up supply will allow supply chains to untangle somewhat as 2022 progresses, but issues will not likely disappear
• Given the shifting balance of supply and demand, inflation in 2022 will be lower than in 2021

Producers will likely have a chance to catch their breath a bit in 2022. Activity will still rise next year, but the pace should be slower. Ensure your business is prepared with adequate, but not excess, capacity for growth. For many businesses, labor constraints will likely pose the largest problem. A tight labor market is highly likely in coming years, so businesses must be creative with their benefits and seize opportunities to attract and retain talent. Firms must also take extra care to monitor their finances on the back side of the business cycle. Consumers have thus far been willing to accept higher prices, but they may become more price sensitive next year. Keep your price increases on track within your industry to preserve your margins. At the same time, hone your competitive advantages and advertise them to existing and potential customers to avoid competing on price alone.