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Supply Chains Remain on the Road to Recovery

Supply Chains Remain on the Road to Recovery

May 15, 2023
"We expect supply chain issues to clear in H2 as tighter lending conditions, inventory drawdowns, and softer consumer spending alleviate stress," says Oxford Economics.

News on the inflation front in April was encouraging from a supply chain perspective according to. Oren Klachkin, lead US Economist at Oxford Economics.  The following is his analysis.

Supply chain stress eased in April, which will put downward pressure on goods prices and allow the Fed to pause in its tightening. We expect supply chain issues to clear in H2 as tighter lending conditions, inventory drawdowns, and softer consumer spending alleviate stress. 

Our supply chain stress tracker fell in April to its lowest since March 2021. A weaker economy and reduced logistics pressures led the declines in our proprietary tracker. Prices remain elevated, though lower commodity and transportation prices pushed this component lower on a monthon-month basis.

Inventories shrank as businesses pulled back on restocking.

Resilient demand for workers buoyed the labor component of our tracker.    

Producer prices were promising as core goods prices rose only 0.8% y/y and the ISM manufacturing survey signaled future weakness in inflation. However, services inflation was stubbornly high as the PPI for services accelerated to 3.8% y/y and the ISM services edged higher.

Reassuringly, the transportation component of our tracker is moving closer to its pre-pandemic level.. Port data show volumes are down more than 30% y/y. Container shipping rates have resumed declines, and we expect to see a retreat in volumes as the economy weakens, which will add downward pressure on shipping costs.

On the labor market front, strong job growth inhibited the labor component of our tracker from making more progress. The first look at Q1 GDP showed that inventories were a drag on growth, and we believe that stocks fell further at the start of Q2. Destocking will add downward pressure to our supply chain stress tracker.

Meanwhile, the strong US dollar will help take pressure off domestic supply chains by tempering demand for manufactured goods    

We expect supply chain issues to clear in H2 as tighter lending conditions, inventory drawdowns, and softer consumer spending alleviate stress. 

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