Why is a supply chain recovery key?
By Peter Yengst22 November 2021
Supply chain issues are expected to plague all parts of business and industry going forward
As the country comes rolling out into the fall, we are confronted with an economy that appears to be losing much of its enthusiasm and momentum from the first half of the year. We seem to lurch from headline to headline, facing a quasi-normal reality that has graduated from lockdowns, distancing and mask-wearing to widespread vaccination mandates at work and in social environments such as concert venues, bars and restaurants. While the vaccination rates in the U.S. have slowed, the overall results have been favorable and some sort of normalcy has been restored to the country. Unfortunately, much more is needed if we expect to see better days.
Inflation has found its way into every part of our lives as we watch groceries and gas reach new highs when compared to household income. In D.C., Congress is once again toying with the debt ceiling, which isn’t new, but still an unwelcome discussion that slows the pace of other issues that require government attention.
The long-awaited Infrastructure Bill appeared to be a done deal and ready to pass with bipartisan agreement, at least as it concerns the traditional infrastructure side of things. Then it became contingent on passing the $3.5 trillion “human infrastructure” bill, which has its merits but remains a contentious issue between the political parties due to its long-term funding implications, overall scope and the political risk in upcoming elections.
President Biden’s infrastructure bill
I expect that the traditional infrastructure bill will be released from being held hostage and finally be brought to a vote this month, leaving the human-centered legislation to be addressed in 2022. At the very least, we’ll start working on our roads, bridges, airports, and aging energy grids, which are now decades overdue for a massive overhaul. As has been mentioned before, the machinery markets will see a sales bump from the infrastructure bill’s passing.
Supply chain issues are expected to plague all parts of business and industry going forward. Labor is in short supply for equipment manufacturers, as it is for port/dock operators and the trucking industry that transports products all over the country. Components and parts needed in manufacturing are also in short supply, as pricing of raw materials remains at elevated levels. One outlier, lumber, has come down in price in recent months to a much healthier and close to pre-COVID level thanks to sawmills reopening and working around the clock. That will help keep the cost of building homes and overall construction momentum moving. At the same time, commodities like copper, steel, iron ore and agricultural produce continue to be at heightened levels.
Looking at the heavy machinery markets, they are experiencing the same supply chain shortages, as demand far outweighs supply and order backlogs have been growing due to a lack of inventory at the dealer level. Dealers began building these backlogs at the beginning of the summer and have since been taking new machinery orders on a “first come, first served” basis.
Order backlogs currently run well into next year. Earthmoving equipment sales this year will be defined – and ultimately constrained – by the level OEM output and the manufacturers’ ability to secure raw materials, components and parts to build their machines. If demand were to fall off for any reason, such as a weakening economy or a housing slowdown, the list of backlogged orders will shrink, and dealer inventories will be allowed to grow once again. While weaker demand has its downside, that inventory growth can be seen as a positive as it will help ease inflationary pressures that end up in the buyer’s lap when supply of machines is low.
Covid-19 pandemic supply chain impact
The truth is that our markets and people in everyday life are now well aware of just how fragile the world’s supply chain architecture really is. We never fully realized it until COVID hit the “off” switch for multiple months, and it could end up being years before the supply chain is fully functional again.
If we could focus more on solving today’s supply issues by getting more people back to work and unplugging the congestion at our coastal ports (such as the ports of Los Angeles and Long Beach), we might start seeing some improvement. The West Coast has a record-breaking traffic jam of container ships just off Los Angeles. A blocked artery eventually ceases to flow, and even a restricted supply flow delays an economic recovery.
Improvements over last year’s debacle are inevitable, and I’m confident this year’s end will reflect that progress. But growth depends, first and foremost, on a supply chain recovery that will greatly benefit manufacturing, distribution and our current unmet demand.