The main causes of Supply Chain Disruption Caused by the Pandemic

These are times of rapid transition for the U.S. economy. With the winding down of the worst of the pandemic, businesses have added jobs at a rate of 540,000 per month since January. Many consumers are making large purchases with savings accumulated during the pandemic, sending new home sales to their highest level in 14 years and auto sales to their highest level in 15 years.

While a fast pivot to growth is good news for businesses and workers, it also creates challenges. Entire industries that shrank dramatically during the pandemic, such as the hotel and restaurant sectors, are now trying to reopen. Some businesses report that they have been unable to hire quickly enough to keep pace with their rising need for workers, leading to an all-time record 8.3 million job openings in April. Others do not have enough of their products in inventory to avoid running out of stock. The situation has been especially difficult for businesses with complex supply chains, as their production is vulnerable to disruption due to shortages of inputs from other businesses.

These shortages and supply-chain disruptions are significant and widespread—but are likely to be transitory. Below, we describe the disruptions, the ways that supply chains have adjusted to disruptions in the past, and how the Administration is working to address both short- and long-term supply chain issues. Car and housing inventories are also at or near record lows, with just enough stock to last for one month and 4.4 months respectively, compared to around two and 5.5 months respectively before the pandemic hit. This shortage of stock has generated ripple effects across the manufacturing supply chain. 36 percent of small firms in the most recent U.S. Census Small Business Pulse survey (conducted between May 31 and June 6) cited delays with domestic suppliers, with the majority of these delays occurring in the manufacturing, construction, and trade sectors (Figure 2). Industry-specific studies on input shortages imply these levels are substantially higher than typical, but no comparable survey data exists from before the epidemic. 

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There is evidence to show that these shortages are slowing down commerce in several industries. The National Association of Homebuilders found that in May, a record number of builders reported shortages of essential supplies such as frame timber, wallboard, and roofing. Due in part to these shortages, builders have been cautious about beginning new homes in recent months.

The shortages have also caused sudden price spikes. The Producer Price Index showed a 19% rise in commodity prices between May 2020 and May 2021, the biggest annual increase since 1974 due in part to base effects. Some of the rises have been far more pronounced than others. Due to a temporary timber shortage last month, homebuilders drove prices up to $1,711 per thousand board feet. At that rate, the cost of constructing a standard 2,000-square-foot home would be almost $27,000, up from roughly $7,000 before the outbreak. [1] The fast decline in lumber prices—down 38% from their peak—could be a precursor to a temporary easing of supply constraints.

Disruptions in the supply chain are having a significant effect on consumer costs, particularly in the automotive industry. If we include new, used, leased, and rental car costs, this category accounts for more than half of the rise in core inflation as assessed by the Consumer Price Index in May. Moreover, the price growth in this industry was responsible for a third of the overall price inflation during the previous year. Automakers seem to have miscalculated demand for their goods following the onset of the pandemic, which has led to a number of urgent issues in the automotive sector. They canceled orders for semiconductors, which have a longer lead time, and are seeing a secular growth in demand from other sectors since they expected sluggish demand. The dispersal of the automotive supply chain over several nations and companies in the last few decades has not helped matters. Because of this tendency, it may be difficult for automakers to pinpoint the origins of bottlenecks; for instance, a semiconductor may be developed by one company, produced by another, inserted into a component (such as an airbag), and then sent to an automaker’s assembly facility. Lack of trust among partners in supply chains means that the automobile or semiconductor manufacturer often cannot track what happens in these intermediary levels (or “tiers”) of the supply chain, for fear that the knowledge may be used to replace them or to negotiate for a lower price. 

While these challenges are particularly apparent in semiconductors, they are evident in other sectors of the vehicle supply chain as well. The auto business is “the industry of industries,” therefore the price of automobiles is determined by the cost of the 30,000 components in the car, from semiconductors and steel to plastic to rubber, and the logistics of moving these parts across various national boundaries.

While the economy-wide magnitude of these constraints is unique, the history of supply interruptions in certain sectors may give hints as to how the gaps will be remedied over time. In the past, numerous sectors have been blindsided by high demand and stuck with too little inventory of certain commodities. Others have been faced with a supply shock owing to a crop failure or a natural catastrophe that put critical industries permanently offline, such as the 2011 earthquake in Japan. In many such circumstances, markets worked their way back to equilibrium pretty rapidly.

Take coffee, for example. As some coffee aficionados might recall, coffee prices have soared periodically owing to frosts that destroy coffee crops, most lately in late 2010. Each time, the weather stabilized, crops improved, and prices dropped back to their earlier levels. Similar transitory price surges have happened in markets for agricultural products and other commodities—peanut butter after a drought in 2011, or eggs amid an epidemic of avian flu in 2015. The toilet paper scarcity in the earlier years of the epidemic provides another good case study. Stay-at-home orders led to a sudden 40-percent rise in demand for shop toilet paper, the fluffier sort used by families. Yet supply cannot grow overnight to fulfill demand. Toilet paper is heavy to store, and demand is generally extremely consistent, which prompted merchants to retain just two to three weeks of sales in stockpile and manufacturers to run their factories at 92 percent capacity. Worried they might be left without loo paper, Americans wiped up shop shelves. 

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