There’s Nothing Wrong With Our Supply Chain..Yet
When I walked into my local supermarket in San Francisco a couple weeks ago, entire rows of shelves were empty. And my experience wasn’t unique — as greater awareness of the COVID-19 pandemic settled in, Americans flocked to snatch up every last bit of toilet paper (and a range of other household goods). What’s behind the panic buying?
Some anticipated a prolonged quarantine at home. Many others, however, simply expected a shortage of supplies and wanted to get their stock before their neighbors. Is it possible that at some point our shelves will stop getting restocked? Could our supply chain simply break down?
Finding the answer to this question means taking a close look at what makes up our supply chain. A supply chain starts with raw material that is manufactured into end products and then delivered to end consumers. To analyze our supply chain, we need a bird’s eye view of what’s happening in manufacturing, restrictions on imports and exports, and the logistics behind delivering products into the hands of consumers.
First, let’s look at the manufacturing data.
In the US there are already some supply chain disruptions occurring. A recent survey by the National Association of Manufacturers found that 35.5% of them are seeing some form of disruption in their supply chain as a result of their pandemic. That sounds bad. As do reports of plant shutdowns. At the same time, according to the US Bureau of Labor Statistics unemployment in manufacturing remained at the relatively low level of 4.2% in March 2020. While it will almost certainly rise substantially with the recent jump in unemployment claims, the data suggest that US manufacturers are generally keeping the lights on.
Looking ahead, Goldman Sachs released an estimate indicating that manufacturing activity is expected to drop by 35% in April before rebounding in May and June. But that prediction masks a more interesting granular picture in Goldman’s research. Some manufacturing will actually increase to meet demand, like in food and beverages and medical equipment. But automotive and retail will drop because no one is buying cars or wandering into J Crew. So, at least according to Goldman, the laws of supply and demand will continue to function in the short term. But what does the longer term hold?
To answer that question, it’s worth looking at China, which has been ahead of the US in both experiencing and (hopefully) taming the virus. China effectively shut down its factories for a couple of months. And the shortage of parts and products that had been produced by China will likely ripple through the supply chain for the next couple of months.
At the same time, Xinhua, a Chinese state news agency, said on March 21st that “Roaring Chinese factories (are) in full swing.” While the Chinese government is almost certainly putting a rosy glow on a slow recovery, manufacturing is, in fact, gradually picking up — Foxconn is back to producing iPhones and carmakers ranging from Nissan to Ford have reopened their Chinese factories. So while manufacturing shut down briefly in China, the real problem the Chinese economy faces today isn’t the virus, it’s the drastically reduced global demand. That’s good news for economies that want to follow in its footsteps because demand will gradually return as the virus wanes.
And what about the global food supply chain?
While the United Nations Food and Agriculture Organization has predicted a “looming food crisis,” this appears most likely to take place in countries that are net food importers. And the US is the largest exporter of food globally. We don’t have to worry about whether other countries shut down — just about whether we do.
According to the FDA’s commissioner of Food and Drugs, Stephen Hahn, that’s not a problem for the moment:
“Empty grocery shelves are largely due to unprecedented demand — not a lack of capacity to produce, process and deliver.”
That said, we will likely see shortages and price hikes of certain goods — like a couple weeks ago when Kazakhstan, one of the world’s largest wheat flour exporters, decided to ban all exports.
What about recent walkouts by employees at Amazon, Instacart, Whole Foods, etc. over insufficient safety measures? Do these suggest the possibility of disruptions in the future? Probably not. With millions suddenly unemployed and these companies being among the few who are hiring in large numbers, there’s good reason to expect they’ll be able to continue to find the labor necessary to drive the engines of America’s warehouses, grocery stores and last mile delivery.
So what should we expect?
Fear makes people unpredictable. And Donald Trump often seems to govern by the seat of his pants. So nothing is certain. But American manufacturing and food supply chains are still working for now. And they are likely to continue to do so if the US can mount a strong, albeit delayed, public health response to the virus. (The verdict on this is still out.)
One of the few things that supersedes fear of the virus is the need to pay rent. Large corporations will become better at giving their employees the safety measures they deserve. And they’ll continue to find employees who are willing to work despite the risks because, in this economy, many people tragically have no other options.
The takeaway: While there will be price hikes and some shortages, and while the public health and economic circumstances are concerning in the extreme, you can probably stop hoarding the TP.