One of the defining characteristics of the economy since the pandemic ended are the words “supply chain disruption.”
It’s not just analysts and business executives talking about it.
Federal Reserve officials are also looking at the issue.
Supply chain disruptions aren’t only a challenge to businesses.
They threaten the economy.
If businesses can’t find effective ways to meet production goals, the economy can’t grow.
How the Fed Spots Supply Chain Issues
To help policymakers guide the economy, Fed economists created the Global Supply Chain Pressure Index (GSCPI).
To calculate the index, economists measure global transportation costs and incorporate Purchasing Managers’ Index (PMI) surveys from facilities in:
- China.
- Europe.
- Japan.
- South Korea.
- Taiwan.
- The United Kingdom.
- And the U.S.
The index highlights inflationary pressures back to 1997.
While it reached new highs after the pandemic, the record before then reflects what the index may show when the economy is back to normal.
The GSCPI peaked in December.
GSCPI’s December Peak Means Good News for Supply Chain
Source: Federal Reserve.
The chart above shows that the index soared as the pandemic shut down the global economy.
This was an unprecedented stress to supply chains.
But the indicators were moving toward normal levels in the summer of 2020 before soaring to an all-time high in 2022.
With recessions looming around the world, it’s unlikely the index will turn up in the next few months.
This should allow supply chains to return to normal, although the new normal will be different than the supply chains of 2019.
The New Normal
Companies are increasing inventories so they can weather short-term disruptions.
This process seems to rely on PMI data.
That will ease inflationary pressures.
But maintaining optimal inventory levels will slow new orders and could be the final event that pushes economies into recession.
The magnitude of the economic disruption associated with the pandemic hasn’t been seen in decades.
Bottom line: In the past, large-scale disruptions like wars and depressions took years to work through the system. There’s no reason to believe this time will be different.
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Michael Carr is the editor of True Options Masters, One Trade, Precision Profits and Market Leaders. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.