Shipping is disrupting global trade and making headlines again, but the latest constraints aren’t yet holding back factory activity in major developed economies or threatening another flareup of inflation.
That’s the counterintuitive view from a leading US supply-chain professor as concerns grow that the world is headed for the 2.0 version of the Big Supply Crunch — the economic disorder which whipsawed freight markets, slowed manufacturing and boosted consumer prices during the pandemic.
In recent weeks, ocean cargo rates have jumped and congestion has risen in some key ports. Airbus, the world’s largest airplane maker, on Monday added to the worries by saying its parts shortages are getting worse rather than better.
But overall, factories are absorbing new transport strains caused largely by Houthi attacks on ships through the Mideast, because demand looks softer than it did two or three years ago, according to Jason Miller, a professor in the supply-chain department at Michigan State University, the nation’s top undergraduate program in the field.
‘Weaker Demand’
“The Red Sea crisis hasn’t had the feared negative knock-on effects in European and US manufacturing output because weaker demand conditions have meant that any constraints that have been experienced can be addressed without adversely affecting output,” Miller wrote in an email Monday.
He laid out a few reasons to explain the difference between now and then. Two years ago, the number of US and European manufacturers citing demand as a reason for holding back production was much lower. Once a tailwind, demand is now more of a headwind.
In the first quarter this year, the share of US manufacturers citing “insufficient orders” for operating below full production stood at 69%, up from its pandemic low of about 50% and back to where it was at the start of 2020. That’s also well above supply limitations, according to Census data compiled by Miller.
The Dallas Fed’s monthly manufacturing survey released Monday bolstered Miller’s case. “Orders are hard to come by, layoffs have been made, and the future really doesn’t look that encouraging,” according to a Texas-based machinery maker. “Our sales team is flipping every rock.”
In Europe, too, a “lack of demand is being cited more frequently as a limiting factor,” Miller said.
He also points out that US data through the first quarter shows supply factors continued to be less of a problem, extending their steady decline from pandemic peaks.
During the Covid years of 2021 and 2022, three big supply reasons — transportation, material shortages and insufficient labor — were cited more frequently as production inhibitors than demand was. Readings of all three have fallen close to 2019 levels.
Other, less quantifiable factors are helping make the current wave of stress more manageable: Supply-chain managers are using more technology to improve their performance, and a lot of them now have battle scars from years of uncertainty.
“There is little doubt that supply chain managers are better at dealing with disruptions today than five years ago, which has likely mitigated some of this impact,” Miller said. “In the organization sciences, we talk about how firms develop ‘dynamic capabilities’ that allow them to better adjust their standard operating routines.”
Inflation Question
The big question is whether consumer prices are going to follow container shipping rates higher again. The professor isn’t raising any alarms based on the latest data.
“I’m not concerned from an inflationary standpoint,” Miller said, citing San Francisco Fed figures that show imports account for about 10% of consumer spending and “ocean shipping costs tend to be a small percentage of the value of imports.”
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