October 2021 – Scott Rosenquist, CFA®
The global supply chain continues to show signs of strain as shortages of labor, transportation, and storage coincide with strong demand for goods going into the holiday season. The ports in California have a record number of ships waiting to unload while there are not enough truck drivers to move the containers. Covid-related shutdowns to factories across the globe has limited the production of important components such as semiconductor chips. The auto industry has lost production this year due to the chip shortage. All these issues highlight the importance of supply chains to the economy.
There are several implications of the current supply chain issues including the impact on corporate earnings and inflation. As third quarter earnings reports release, inflation pressures on businesses will be a hot topic. Large companies that have scale will have more levers to pull to limit the impact. Certain industries will be more exposed than others depending on the nature of their business (retail vs. software company for example). Companies can also choose to raise prices to maintain their margins. Earnings estimates for the quarter, while still quite positive have slightly decreased as the quarter ended.
On the inflation side, how long these issues last are a topic for debate. The Federal Reserve updated their economic projections during their September meeting. Their inflation forecast for 2021 increased to 4.2% from 3.4% and then dropping to 2.2% next year. The Fed measures inflation using the personal consumption expenditure (PCE) index which runs lower than CPI. Federal Reserve Chairman Jerome Powell commented on the matter recently during a panel discussion. Powell stated, “The current inflation spike is really a consequence of supply constraints meeting very strong demand, and that is all associated with the reopening of the economy, which is a process that will have a beginning, a middle and an end.”
The process of reopening the economy is going to take time as shortages and bottlenecks in the supply chain work themselves out. It appears these problems will extend into next year. In the meantime, the market will be focused on any commentary from company management on these issues.
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