Supply-Chain Stress That Peaked in Covid Heads Higher Again

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Japan PMI

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Some recent economic data look strong, until closer inspection shows the numbers reflect uncertainty and concern rather than underlying demand strength. 

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Japan’s manufacturing purchasing-managers index from S&P Global has reached the highest since January 2022, with production gaining the most in more than a decade and new orders picking up. On the surface, that all seems positive for the world’s No. 4 economy.

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But the jump was partly linked to Japanese companies stockpiling on war concerns. The average time for inputs to be delivered increased by the most since April 2011, right after the Tohoku earthquake, it added.

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“The current boost to manufacturing could soon fade unless we see reduced market uncertainty and more stable supply chain conditions, particularly if market demand weakens and stock-building activities start to reverse,” Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said in the report on Japanese factory activity.

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Delivery Times

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In the US, delivery times in Institute for Supply Management reports have lengthened by the most since 2022, and input prices haven’t risen this fast in four years, HSBC’s Rajanayagam noted.

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“This is before considering the added uncertainty from possible US tariff actions in the coming months,” she said. “So, despite global trade having ended last year on a pretty strong footing, we could see a sharper deceleration than initially expected in world trade growth this year.”

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Logistics Managers

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Another US metric flashing inflationary signs is the Logistics Managers’ Index, a monthly survey distributed by Associate Professor Zac Rogers of Colorado State University. The LMI measures costs and capacity in three key areas of supply chains — transportation, inventories and warehousing.

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The latest LMI shows pressure is mounting in multiple places. Warehousing capacity “is tight everywhere” and shrinking at the quickest pace since March 2024. 

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Looking ahead, predictions for inventory cost growth are nearing “extreme rates of expansion and suggests that, even with freight consolidation, costs will continue to increase significantly over the next 12 months,” the report said.

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Transport costs have hit the highest reading since the spring of 2018 and were just shy of the all-time record, according to the LMI survey.

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One obvious question is whether higher costs and slower deliveries will lead to shortages of parts that factories need to keep producing. The answer broadly is not yet, though some granular numbers bear watching. 

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Parsing the Data

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Jason Miller, a professor of supply-chain management at Michigan State University, crunches numbers on shortages among his other research topics. 

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He said ISM numbers for the US showed “a bit of an uptick” last month, with six commodities identified to be in short supply. They include aluminum, bearing and electrical components, semiconductors and an industrial chemical called propylene glycol. 

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That’s nowhere near the peak of more than 25 items during the pandemic, and is more akin to pre-pandemic levels seen in 2017 and 2018, “with the caveat being that demand growth as measured by new orders is weaker today than back then,” Miller said.

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German Manufacturing

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Given Europe’s greater reliance on Middle East energy, the picture looks a little dicier in Germany, the region’s largest manufacturing power, where demand is a far greater factor holding back production than supply problems, according to Miller.