A pain in the bottleneck for supply chains
There are tentative signs that substantial supply chain bottlenecks in the US are starting to ease. But delivery times remain elevated, and we see inflationary pressures in some sectors persisting well into 2022.
Supply chains have been stretched to the breaking point over the past year thanks to the interaction of surging demand for goods and pandemic-induced logistical bottlenecks. This has exacerbated inflationary pressures and, in some cases, dampened factory output as manufacturers have been forced to scale back production due to supply shortages.
Some relief appears to be in sight. The chart below looks at whether supply chain bottlenecks in the US are starting to subside and what this may mean for prices, drawing on recent manufacturing survey data and insights from our Fidelity International analysts.
The latest manufacturing survey from the Institute of Supply Management (ISM) shows that the index for supplier delivery times is falling after reaching its worst level since 1974 earlier this year (a higher reading indicates slower deliveries). The index of prices paid by manufacturers has also started to fall after peaking in June.
For example, an easing of supply chain constraints can be seen in the US lumber market, which over the past year has vividly illustrated how bottlenecks and unusually high demand can affect prices. Lumber prices rose six-fold from their pandemic lows before plummeting this summer as the US economy reopened and the home renovation boom moderated.
“Lumber supply chain bottlenecks are definitely being worked out and prices have now made an almost complete 180-degree turnaround back to pre-pandemic levels as the supply/demand balance normalises,” reports one Fidelity International analyst covering North American homebuilders and building materials companies.
Bottlenecks remain a problem for some sectors
Factory activity in the US has been dampened by logistical bottlenecks, so fewer delivery delays should boost the manufacturing industry. But supply chain issues will not disappear overnight and delivery times remain extremely elevated despite the ISM index falling from multi-decade highs. The situation can vary greatly depending on the industry.
Some Fidelity analysts believe that congested supply chains will remain a problem into next year. “The number of ships anchored off the Port of Los Angeles that are waiting to be unloaded - a good proxy for freight backlog and bottlenecks - has now increased again after easing in the spring,” reports one analyst covering North American industrials firms.
This, coupled with the fact that a Covid-19 outbreak has this month led to the partial shutdown of China’s Ningbo-Zhoushan container port, the third-busiest in the world, means that many companies are now taking the view that supply chain issues are going to persist through the rest of the year and into 2022.
Inflationary pressures will linger
Any moderation in short-term pricing pressures also does little to alter the longer-term outlook for inflation. Rising labour costs in lower-wage sectors, the hefty price of decarbonisation, and strong demand for US housing that is set to outstrip supply are just a few of the inflationary forces that suggest price pressures are likely to persist into next year and beyond. Bottlenecks may be starting to abate in some areas, but higher prices are likely here to stay.
MORE ON Macro
Anthony Doyle is Head of Investment Strategy for the Firetrail S3 Global Opportunities Fund. His primary responsibilities include fundamental idea generation, portfolio analysis, and economic insights including currency and macroeconomic risk...