The Supply-Chain Storm: Planes, Cranes, and Automobiles

Supply-chain issues are often cited in the current debate about inflation—and aren’t going away as quickly as consumers and businesses would like. Our Franklin Templeton Investment Solutions team explores how supply chains became stuck, whether they will loosen up in 2022, and the implications for multi-asset investors.

Overview and Key Points

Consumer behavior has shifted following the COVID-19 pandemic from services consumption to goods. Consumer demand for durable goods skyrocketed as high savings rates and large fiscal stimulus packages enabled the fastest durable goods rebound on record—something global and domestic supply chains were not prepared for. This combination of surging consumer spending along with numerous supply-chain limitations leads us to explore how exactly the supply-chain mess unfolded and how prevalent these issues may be in 2022.

  • Impact of the COVID-19 recession – Economic and social restrictions, coupled with immense fiscal support, paved the way for significant consumer spending on durable goods.
  • Supply-chain limitations exposed – Globally, corporations’ push for increased profits has led to a complex supply chain that is brittle in some spots and unable to handle the surge in global goods demand.
  • The perfect storm: Los Angeles/Long Beach ports (LA/LB) – US domestic supply-chain issues have been most prevalent in the ports of LA and LB. A combination of domestic supply-side issues, including a shortage of truck drivers, warehouse space and dock space, have amplified global issues caused by durable goods demand.
  • Normalization is slowly beginning, but risks remain – Recent data reveal some tentative easing of supply-chain conditions; however, normalization is unlikely until the second half of 2022 with a variety of risks.
  • Multi-asset implications – Supply-chain problems are primarily due to increased demand, which is supportive of growth-oriented assets like equities and credit. One risk we are monitoring is margin pressures. We prefer short-duration fixed income exposure and are monitoring how central bank policy evolves amidst the current elevated levels of inflation.

The Supply-Chain Catalyst: A Unique Recession, Policy Response, and Recovery

The global COVID recession was record-breaking in its magnitude and brevity. The fiscal stimulus response to the COVID-19 pandemic was staggering. Worldwide, the fiscal stimulus response reached approximately 15% of global gross domestic product (GDP) in 2020, according to the International Monetary Fund. As a result of this stimulus, and along with higher savings rates, households held a surprising amount of spending power. As limited mobility and economic restrictions persisted, consumer spending across the world shifted away from COVID-sensitive services into durable goods. The ease and continued prevalence of online shopping further contributed to the surging levels of durable goods purchases, especially in the United States (see Exhibit 1).

Exhibit 1: US durable goods spending recovered faster than any post-recessionary period since WWII.

The Complexities of Global Trade

An increasing focus on business profits has led to outsourced production and a focus on “just-in-time” inventory management systems that feature very little slack. This resulted in a global trade and supply-chain system that had become increasingly complex prior to COVID. The system was engineered to thrive in normal economic environments but was clearly unable to deal with the volatile demand surge we observed post-COVID.

In the United States, one key focal point for supply chains is the ports of LA/LB. The LA/LB supply chain debacle represents a confluence of global and domestic factors; these ports function as the key gateway for imported goods produced in Asia and suffer from weak surrounding infrastructure.