Date: Thursday, March 9, 2023
The Federal Reserve Bank of New York this week said stress on the world’s beleaguered supply chains had finally returned to normal — below normal, in fact.
Not so fast, responded a professor at the top-ranked US university for supply-chain management.
After the New York Fed’s Global Supply Chain Pressure Index was posted Monday with a reading of -0.26, sinking below the zero level that’s consistent with the historical average, Michigan State University Associate Professor Jason Miller said in an email that it’s wrong to declare an all-clear and cited other evidence:
- The Bank of Canada’s business-outlook survey for the fourth quarter of 2022, which showed some businesses said price adjustments related to previous supply disruptions continue to filter through their supply chains.
- The Philly Fed’s manufacturing survey for December, which found that 45% of respondents said supply-chain issues moderately or significantly constrained capacity use.
- The US Census Bureau’s quarterly survey of plant use showed issues relating to insufficient supply of materials were still about three times worse than before the pandemic in the third quarter, despite some betterment.
- Institute for Supply Management data showing commodity shortfalls for some products including semiconductors running in excess of 25 months.
The field of economics prides itself on a rigorous peer-review process, and the data used to reach conclusions are often the starting point for such discussions. So it’s worth pointing out that some of Miller’s examples lag New York Fed inputs by a few months.
That begs the question at the outset: Could this debate be a comparison between Miller’s older apples and the central bank’s newer, more normal-looking ones?
No, said Miller, because there are other fresh signals — ocean shipping delays, for one — showing there’s still work to do. Plus, “discussions I’ve had with executives in aerospace, automotive, defense equipment, and chemical manufacturing over the past few months as part of my work with MSU all point towards lingering issues,” he said.
Other experts have offered suggestions to improve the New York Fed’s use of arcane shipping metrics. John McCown, a non-resident senior fellow at the Center for Maritime Strategy, said the central bank places too much weight on volatile spot rates for containers.
“This is a classic case of index creators trading timeliness — using spot rates available weekly and near real time — for the quality of the definitive aggregate index that’s available just monthly and 35 days after each period,” he said.
The New York Fed launched its index near the peak of the strains, in early 2022, with data going back to 1997. It brings together 27 variables on everything from cross-border transportation costs to country-level manufacturing data in the euro area, China, Japan, South Korea, Taiwan, the UK and the US.
In a statement, the New York Fed said its goal with the GSCPI “was to develop a measure of global supply chain pressures that could be used to gauge the importance of supply constraints with respect to economic outcomes. It is not industry specific.”
It’s published monthly and “can be revised as realized data become available, replacing the imputed values generated through principal component analysis,” the statement said.
The GSCPI’s declaration of normal was echoed in an HSBC Bank Plc note released Wednesday. “Whilst there may still be the odd section of the global economy where supply chains aren’t quite back to normal, on an aggregate basis, we’re there,” HSBC economist James Pomeroy wrote.
There’s more at stake than bragging rights in the burgeoning science of tracking supply snarls.
A misreading of signals caused major headaches not just for logistics practitioners over the past three years, but also for central bankers who failed to anticipate the extent to which supply-side disruptions would prolong soaring inflation.
Rely on sub-optimal data and the Fed might get monetary policy wrong, too. Whether or not its read on the economy is correct was the subject of marathon testimony on Capitol Hill this week by Chair Jerome Powell.
“I do believe there is a concern if policy makers are placing too much weight in this one index,” said Miller, who argues that the US Census Bureau’s quarterly survey of plant capacity utilization ought to receive the greatest weight given it’s a random sample of more than 7,000 manufacturing plants.
Both sides can find ammunition in the Fed’s new Beige Book, which said that on balance the disruptions in the US continue to ease.
The phrase “supply chain” was mentioned 11 times in Wednesday’s report, which draws on anecdotal information collected by the Fed’s 12 regional banks through Feb. 27. That’s down from 19 mentions in the January survey and a peak of 40 in April 2022.
“Many contacts indicated they were no longer experiencing supply chain disruptions,” according to information from the Chicago Fed, a district that covers much of the US industrial heartland.
In the Boston Fed district, though, “overall construction costs remained elevated due to lingering supply-chain issues and scarce labor,” while in the Dallas bank’s patch, “overall energy-sector activity has leveled off as labor and supply-chain challenges have weighed on activity.”
Meanwhile, the interim chair of the department of supply-chain management at Michigan State’s Eli Broad College of Business has landed on what he thinks is a more precise characterization than “normal” to describe the current landscape.
“A much better phrase is that supply-chain bottlenecks are certainly unwinding, but we are not back to pre-Covid levels just yet,” Miller said. “If there are no other major disruptive events, my hope is that by the end of summer that we see bottlenecks around 2018 levels. As such, we are making progress, but we just aren’t there just yet.”