LONDON (BLOOMBERG) – Supply strains, while still afflicting many consumers and businesses, are becoming more mundane than menacing like they were six months ago, especially in the US.
Snarls have eased back from their pandemic peaks and some are already adding less inflationary pressure. But the gradual end of the pandemic-driven supply crunch might give way to another potential headache: a slump in consumer demand that throws economic growth into reverse and leads to an ugly inventory pile-up.
“Pressures in the global goods sectors, which have been a central driver of inflation, may finally be easing,” Citi economists led by Nathan Sheets wrote in a research note this month. “The bad news is that this looks to be occurring on the back of a slowing in the global consumer’s demand for goods, especially discretionary goods, and thus may also signal rising recession risks.”
Citi cautioned against declaring an “all clear” on the supply front, and there are reasons to doubt whether clogs in the plumbing of global trade will be cleared any time soon.
Labour strikes, factory disruptions tied to Covid outbreaks in China, Russia’s war in Ukraine, and year-end holiday shipping pressures could tangle logistics networks all over again.
Economists generally agree that US household demand for merchandise will be key to watch in coming months, but they’re split about whether it will stay strong or start to soften. One private indicator suggests it might be poised to tip back toward normal as people dine out, see shows, and travel more than they did during the pandemic.
To help pinpoint this shift back to services spending, Flexport developed its Post-Covid Indicator to monitor how Americans’ divvy up their paychecks. The latest reading shows “consumer preferences shifted slightly away from goods in May,” the San Francisco-based freight forwarder said.
“Looking ahead, the indicator is forecast to hold at close to current levels throughout the third quarter of 2022. That would imply that overall consumer preferences for goods over services will decline but still remain slightly above summer 2020 and pre-pandemic levels.”
Controlling some levers of economic activity is the Federal Reserve, which is set to raise interest rates later this month to try to curb surging inflation. According to the central bank’s most recent regional survey, businesses are still dealing with plenty of supply problems but they seem to be fading in severity.
Here’s a not-so-scientific tally of where things stand in the Fed’s recent observations: the number of times the word “shortage” appears in this survey, called the Beige Book. These could be references to shortages of labour, materials or other keys to production.
While the number is still more than double its pre-pandemic level, it has declined to about one-third of its peak in August 2021.
Another indicator of emerging supply slack after two years of tightness: Ocean freight rates have continued their decline from record highs. Container rates, including these published by Freightos, a digital platform for cargo bookings, are still well above pre-pandemic levels but their trajectory looks increasingly like a slide still searching for a bottom amid uncertainty about consumer spending.
Much of the logistics recovery hinges on China’s ability to remain a trade powerhouse and keep factories and ports humming through its strict rules to control Covid outbreaks. That looked to be intact after the country released numbers on Thursday showing June was the country’s second-best month for exports in at least three decades.
Not everything is on the mend, particularly in Europe, which is seeing extended shipping problems given the region’s proximity to the fighting in Ukraine.