The tight labor market is helping fuel another business headache: a global breakdown in the efficient distribution of goods.
“Most of the time the root cause of supply chain disruption is a lack of sufficient workers,” Conerly says.
When people aren’t available to do the work, efficient production and transportation fall by the wayside. Cargo ships are piling up at ports, causing delivery delays and leading to widespread price increases for supplies. The supply chain imbroglio has engaged a broad spectrum of industries.
“Close to 95 percent of our members are experiencing supply chain issues,” says Megan Tanel, senior vice president of the construction sector at the Association of Equipment Manufacturers. “More than half say the issues are getting worse. There are transportation bottlenecks, materials and component shortages. For the vast majority of our members, these issues are both domestic and global. And they are causing huge constraints on production.”
The increased costs resulting from order backlogs and delivery delays are only exacerbated by the China tariffs. While businesses were expecting some relief from the Biden administration, so far, there has been no move to change the status quo.
“Tariffs on Chinese goods will likely continue,” Conerly says. “In fact, given the friction between the U.S. and China, it’s possible we could even get additional ones.”
The double whammy of supply chain disruption and China tariffs are causing some businesses to look at alternative regional or local sources.
“Many businesses are no longer relying on any single supplier or global region for goods and services,” says John Manzella, a consultant on global business and economic trends out of East Amherst, New York. “They are building more diversified and reliable supply chains. Instead of buying in scale from two very large Chinese suppliers, they might buy in smaller increments from a half dozen suppliers located in different regions of the world. They may also utilize more long-term warehousing facilities.
This strategy, which adds costs but reduces risk, will be extremely beneficial in protecting against the next pandemic, black swan or trade war.”
Finding alternative sources, though, can be easier said than done.
“Many businesses that would like to source domestically can’t find any vendor in the United States that can match Chinese prices,” Conerly says. “And Chinese companies have improved the quality of their goods significantly.”
Adding to this litany of woes is the Chinese government’s increasingly heavy-handed control of industry.
“Some of our members are asking, ‘If we have a critical supplier in China, how likely is it that the government will step in and intervene in that company, which could impact us getting access to our components,’” Palisin says.
The year ahead
As businesses enter the early months of 2022, economists suggest watching a number of leading indicators for an idea of how the year will go. The first is the state of consumer confidence – a vital driver of the nation’s economy.
Given favorable wages and income trends, one might expect consumers are feeling good. In the closing months of 2021, though, the attitude of the American public was surprisingly unsettled.
“It really is difficult to get a good sense of consumer confidence in the current environment,” Hoyt says. One reason, of course, is the unclear path of the pandemic. But another is the recent spike in fuel and other prices, sparking fears of inflation.
How the public reacts to the shape-shifting virus should be more apparent in the opening months of 2022. So should changes in the currency’s purchasing power.
“Inflation will be the key financial statistic to follow early in the year,” Yaros says.
Moody’s Analytics calls for the Core PCE Price Index to moderate to 2.2 percent in the fourth quarter of 2022 as the effects of past fiscal stimulus fade away. The Core PCE Price Index excludes energy and food prices and is the Federal Reserve’s preferred measure of inflation.
Businesses should watch for any higher levels of persistent inflation that might cause the Fed to increase interest rates – a move Moody’s Analytics does not anticipate before 2023.
Yet another leading indicator will be the return-to-work trend.
“More people getting back on the job would confirm a strong 2022,” Conerly says. “Are employers getting the workers they need? Are people earning more money to spend?”
Finally, a nonfinancial force may be more important than anything else.
“The damage done by the Delta variant has taught us that the pandemic is still alive and has the potential to disrupt economic activity,” Hoyt says. “Early in 2022, the leading data will be about COVID-19. What are the trends in vaccination rates? Infections? Hospitalizations? Deaths?”
Favorable answers bode well for a robust year.
Phillip M. Perry is an award-winning journalist who is published widely in the fields of business management, workplace psychology and employment law.