Supply-chain disruptions are severely hampering the global economic recovery. It is a strange situation in many ways. The types of products and services affected by delays and shortages—including a wide range of intermediate goods, from commodities to semiconductors, and the final products that depend on them—resemble what one would see in a wartime economy. And the disruptions took us largely by surprise.
In fact, in the first quarter of this year, growth was overwhelmingly projected to accelerate, and experts were not exactly sounding the alarm that supply would fail to keep up. Yes, influential macroeconomists did warn that the combination of highly accommodative monetary policy, elevated household-savings balances, pent-up demand, and massive fiscal spending significantly increased the risk of inflation. And, yes, those forecasts—which appear increasingly prescient—implied that a surge in aggregate demand, fueled by a wall of liquidity and frothy asset prices, could outpace supply. But the likely duration of the imbalance remained unknown, and many argued that inflation—and, by extension, supply disruptions—would be “transitory.”
Many observers remain convinced that this is the case. But participants in global supply chains increasingly predict that the shortages, backlogs and imbalances between supply and demand will persist well into 2022, and perhaps longer.
It seems clear that, for some significant period, global economic growth will be constrained by supply—a sharp contrast from the years after the 2008 global financial crisis. Although the surge in demand may be larger than mid-pandemic forecasts indicated, it was the basis for the high growth projections in the pandemic recovery period.
That makes it all the more important to address two fundamental supply-side questions. First, are there underlying supply constraints that will persist even after pandemic-related blockages are cleared? And, second, is there something about the configuration and functioning of global supply chains that affects the supply response?
One can reasonably make the case that the pandemic produced semi-permanent changes in some supply factors. For starters, many workers have dropped out of the labor market or deferred re-entering it, despite the rollback of pandemic-support mechanisms. This probably has much to do with the highly stressful or dangerous conditions under which some, such as healthcare personnel, worked during the pandemic. Many cargo workers were stranded on ships for months.
If workers are to accept such positions now, they will probably demand better compensation and changes in working conditions. Likewise, many of those who shifted to working remotely during the pandemic are resisting a full-time return to the office. Such shifting demands and preferences imply supply-side changes in many segments of the labor market, with unknown long-run effects.
But labor-supply effects are only part of the story. We knew that a surge in demand was coming. So, why were global supply chains caught flat-footed?
One reason is that pent-up demand was unleashed before the pandemic was actually over. So, as demand increased, pandemic-related disruptions continued to affect major ports and manufacturing facilities, dampening the supply response.
Another factor is that demand seems to have risen beyond the system’s peak load capacity. Expanding that capacity will require investment and, more important, time. But, while peak load capacity is crucial in services like electricity (which is difficult to store), it is less important for goods, demand for which must be managed with a well-functioning system that anticipates surges and spreads out the order flow.