Before 2021, supply chains were mostly invisible to consumers. Sometimes a package might show up late, or a certain item might not be available at your favorite store, but the long chain of logistics that carried a product from factory to shelf — or these days, your doorstep — was something for corporate big-wigs to worry about, not their customers.
This lack of awareness extended to the media as well. As The New York Times confessed recently: "We didn’t even have a logistics beat before the pandemic. Now we do."
Then, in early 2021, something happened that placed supply chains at top of mind for both policy makers and consumers. Throughout 2020, COVID-19 shutdowns paused or slowed production across the world. Countries such as China, Taiwan, and Vietnam, where much of global manufacturing is based, were especially hard-hit, causing a worldwide domino effect.
In response, companies cut their orders, and shipping companies reduced their schedule, fully expecting the pandemic to cause a recession. This would have been the right response if demand had dropped off due to the shutdowns, but the exact opposite happened. While demand for services hit rock-bottom, demand for manufactured goods skyrocketed.
The reasons for this are still being debated, but a common story goes something like this: Some combination of fiscal policy (like government stimulus checks), work-from-home orders, and forced closures of restaurants shifted demand away from services and toward stuff, things, objects. Instead of spending money at a nice restaurant, consumers were building home offices or decking out their kitchens, which were now getting a lot more use, with new appliances.
The data on this is striking. According to the U.S. Bureau of Economic Analysis, spending on durable goods was $1.5 trillion in February 2020 before the pandemic. Just over a year later, it was up to a record-high of $2.1 trillion and remained near those levels through at least November.
On top of continued demand for durable goods, ports remain clogged. Producers are still struggling to keep up with demand, and labor shortages in key industries, such as trucking, continue to exacerbate bottlenecks. So 2021's supply chain woes are quickly becoming a 2022 problem as well. Here's what experts are anticipating for Year Two of the supply chain crisis.
Omicron and Beyond
Much to the frustration of producers (and everyone else for that matter) the pandemic is ongoing. Even as the world economy works through the disruptions of past waves, the omicron variant is bringing its own economic impact that is just beginning to be felt.
While some disruptions in production, shipping, and the labor market are expected, some economists are cautiously optimistic this wave will come with a faster recovery.
"Even with the experience of the past two years, there is no model that can predict how the economy responds to a pandemic," wrote Jack Kleinhenz, chief economist for the National Retail Federation, in a recent report. "What we have learned is that each successive variant has slowed down the economy but that the degree of slowdown has been less."
At the same time, the industry group is fully anticipating supply chain disruptions in 2022.
One factor that is slightly more predictable is the pandemic response of the Chinese government, which throughout 2020 and 2021 maintained a stringent "zero-Covid" policy that responded to outbreaks with aggressive shutdowns and quarantine measures.
The government is sticking to that approach with omicron. The city of Xi'an has been on lockdown for two weeks due to rising cases there. While the closures are reportedly leading to local shortages and social unrest, the global implications are still unclear.
Of more immediate concern is what happens to the producers that are the linchpins of China's export economy. The country has already suspended the inbound feeder services that carry cargo into the Pearl River Delta, which touches cities such as Hong Kong and Guangzhou.
These feeder services are key to connecting the major coastal ports with inland producers. In response, some global shipping companies are already suspending orders bound for the area, effectively cutting off manufacturers from the raw materials they need to produce.
Considering that shutdowns at Chinese manufacturers were so central to last year's cascade of supply chain issues, new shutdowns are likely to set back the clock on removing bottlenecks.
Add in the upcoming Chinese New Year and the Winter Olympics, which China is hosting, and the world's manufacturing hub is staring down some serious disruptions early in 2022.
As trade credit insurer Euler Hermes noted in a recent report, "China’s sustained zero-Covid policy and Chinese New Year in February 2022" will likely "keep supply bottlenecks high."
Durables vs. Services
In addition, demand for the kinds of durable goods that countries like China produce shows few signs of slowing, at least in the short term.
While some economists have long predicted a shift back to services as the restaurant and hospitality sector bounce back, successive COVID waves have challenged that assumption.
"Supply chain disruptions are likely to persist well into 2022, partly because of the resurgence of COVID-19," wrote Kleinhenz. "Little is certain about omicron’s impact on consumer demand, but people who stay at home because of the variant are more likely to spend their money on retail goods rather than services like dining out or in-person entertainment."
The numbers also seem to suggest that demand for durable goods isn't slowing. The Census Bureau reported last month that new orders for manufactured durable goods had increased 2.5 percent, or $6.5 billion, in November, which was well above estimates.
Some of this demand could taper off as household savings, which skyrocketed during the pandemic to a peak of 33 percent in April 2020, return to normal levels.
"In the US, we expect the saving rate to reach its pre-crisis level (7.3 percent of disposable income) towards the end of 2022, as the recovery in labor markets will support household purchasing power," Euler Hermes wrote.
However, not all of this demand is coming from American consumers. Companies are also driving the trend by growing their inventories in order to avoid future shortages and production delays of their own. This gives individual companies more of a buffer in a lean, just-in-time supply chain, but it actually worsens bottlenecks by significantly increasing demand.
These so-called "bullwhip effects" are still evident in the data, but economists, such as the Bank of International Settlements, predict it will also work its way out as supply chains normalize.
"Once bottlenecks begin to ease, the feedback loops could operate as a virtuous circle to mitigate the bullwhip effects," the international bank wrote in a white paper from late last year. "In this way, just as bottlenecks have persisted longer than initially expected, their resolution could also follow more swiftly than currently feared."
In the world of shipping, one of the biggest uncertainties of 2022 is the upcoming contract negotiations between West Coast marine terminals and the International Longshore and Warehouse Union, which represents 22,400 dockworkers.
If history is any guide, there is some cause to worry about how this might impact the economy. The last contract negotiations in 2014 and 2015 came with severe shipping delays, and this time the stakes are much higher, as major terminals such as the Port of Long Beach remain jammed.
"Although some metrics indicate that the worst congestion may already be past, few players expect market fundamentals to find their balance in the first half of 2022, which could be compounded by stormy labor negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association," wrote S&P Global in a memo.
Workers are likely to point to ports' record profits and imports, despite supply chain delays, while shipping companies and port operators have already tried to put off negotiations in favor of first addressing the crisis.
Talks are expected to begin in early spring.