Gauges of Supply Chain Stress Head Higher

Ships anchored off the Port of Long Beach in California. (Tim Rue/Bloomberg)

The impact of the energy crisis that struck the global economy in recent months is showing up in gauges of supply chain stress that flashed red during the pandemic, adding to reasons for central banks to be on guard for a recurrence of high inflation.

The following dashboard of logistics activity shows that some gauges are at their highest since the 2020-23 period, when economies locked down, shortages emerged and shipping snarls persisted. 

While the indexes are still far from their COVID highs, they reflect disruptions to global trade from the Iran war that bear some similarities to what happened back then. Logistics captures the movement of goods between suppliers, factories and end-consumers, and accounts for an estimated 10% of world GDP, showcasing its important role in the global economy. 

“The closer we get toward actual quantity constraints on key commodities, the more upwards pressure we’re likely to see on prices,” said Shanella Rajanayagam, a trade economist at HSBC Holdings Plc.

Fed Gauge

Fresh strains are reflected in the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index. After going quiet for the past three years, it has risen for three straight months — with an especially pronounced increase in April to the highest level in almost four years.

World Bank

The World Bank’s Global Supply Chain Stress Index is flirting with its pandemic peak. This measure focuses on fluidity in container shipping and ports, and looks at larger vessels that typically sail long international routes.

A contributing factor to the current level for the index is the decision by many cargo carriers — for safety and insurance reasons — to avoid the Red Sea since late 2023. Taking a longer route, around southern Africa, to avoid conflict in the Mideast adds time and fuel costs, and stretches capacity.

One Big Carrier’s Plans

Vincent Clerc, the  CEO of A.P. Moller-Maersk A/S, explained on Bloomberg TV last week how the world’s No. 2 carrier will adapt to an extra $500 million in monthly costs expected through the second quarter. 

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Clerc 

The Copenhagen-based container line plans to charge customers more to fully recoup added energy expenses, and can slow ship speeds to conserve fuel, he said. The challenge will be finding the right balance between cargo rates and sustaining a solid level of demand for the service.

“What is impacting freight rates is the energy shock” and “our belief is that those energy costs are so high that nobody can just shoulder them,” Clerc said. “If we look further into the year, with respect to what are going to be the secondary impacts of this war — inflation, possibly a reduction in demand.”

Maersk ranks No. 7 on the Transport Topics list of the top global freight companies.

Japan PMI

Some recent economic data look strong, until closer inspection shows the numbers reflect uncertainty and concern rather than underlying demand strength. 

Japan’s manufacturing purchasing-managers index from S&P Global has reached the highest since January 2022, with production gaining the most in more than a decade and new orders picking up. On the surface, that all seems positive for the world’s No. 4 economy.

But the jump was partly linked to Japanese companies stockpiling on war concerns. The average time for inputs to be delivered increased by the most since April 2011, right after the Tohoku earthquake, it added.

“The current boost to manufacturing could soon fade unless we see reduced market uncertainty and more stable supply chain conditions, particularly if market demand weakens and stock-building activities start to reverse,” Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said in the report on Japanese factory activity.

Delivery Times

In the US, delivery times in Institute for Supply Management reports have lengthened by the most since 2022, and input prices haven’t risen this fast in four years, HSBC’s Rajanayagam noted.

“This is before considering the added uncertainty from possible U.S. tariff actions in the coming months,” she said. “So, despite global trade having ended last year on a pretty strong footing, we could see a sharper deceleration than initially expected in world trade growth this year.”

Logistics Managers

Another U.S. metric flashing inflationary signs is the Logistics Managers’ Index, a monthly survey distributed by Associate Professor Zac Rogers of Colorado State University. The LMI measures costs and capacity in three key areas of supply chains — transportation, inventories and warehousing.

The latest LMI shows pressure is mounting in multiple places. Warehousing capacity “is tight everywhere” and shrinking at the quickest pace since March 2024. 

Looking ahead, predictions for inventory cost growth are nearing “extreme rates of expansion and suggests that, even with freight consolidation, costs will continue to increase significantly over the next 12 months,” the report said.

Transport costs have hit the highest reading since the spring of 2018 and were just shy of the all-time record, according to the LMI survey.

One obvious question is whether higher costs and slower deliveries will lead to shortages of parts that factories need to keep producing. The answer broadly is not yet, though some granular numbers bear watching. 

Parsing the Data

Jason Miller, a professor of supply chain management at Michigan State University, crunches numbers on shortages among his other research topics. 

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Miller 

He said ISM numbers for the U.S. showed “a bit of an uptick” last month, with six commodities identified to be in short supply. They include aluminum, bearing and electrical components, semiconductors and an industrial chemical called propylene glycol. 

That’s nowhere near the peak of more than 25 items during the pandemic, and is more akin to pre-pandemic levels seen in 2017 and 2018, “with the caveat being that demand growth as measured by new orders is weaker today than back then,” Miller said.

German Manufacturing

Given Europe’s greater reliance on Middle East energy, the picture looks a little dicier in Germany, the region’s largest manufacturing power, where demand is a far greater factor holding back production than supply problems, according to Miller. 

German chemical and plastic makers “saw large increases in the shortage of materials” last month, Miller said, while automakers and parts producers “reported a bit of a jump in shortages but nothing beyond historical norms.”

For the U.S. and Germany, Miller indicated that it’s too soon to say whether this is the start of another COVID-like supply shock. Both countries so far have seen “relatively limited impact from the Strait of Hormuz crisis in terms of supply chain impacts serious enough to constrain production.”