Amid the many challenges in today’s economy, there is a bright spot: Supply chains, after a period of severe disruption, are back to normal.
Our RSM US Supply Chain Index pointed to supply efficiency for the fourth month in a row, reaching 0.49 standard deviations above neutral in October.
That means that supply chains have returned to their pre-pandemic level and is a sign that inflation is cooling.
Improvement in the supply chain index came mostly from strong inventory recovery as companies stocked up on goods, fearing the global supply chain snarl might persist.
But as the pandemic has retreated, many companies have been left with excess inventories, forcing them to offer more discounts ahead of the holiday season.
Other components, like capacity utilization and delivery time, were also back to neutral.
Tight labor market
The only sticky component was job vacancies, a proxy for labor supply, which continued to be a drag on the supply chain index.
While the economy is slowing down and there are signs that job vacancies will cool, we do not expect the labor market will be in balance any time soon.
The economy has continued to add hundreds of thousands of new jobs every month while the labor force participation rate is about 1 percentage point below the pre-pandemic level.
It is highly possible that the inflation problem will be under control only after the labor market shows a significant crack.
The takeaway
The improvement in supply chains should give the Federal Reserve more reason to consider a slowdown in rate hikes to avoid pushing the economy into a deeper recession, which in our base case will happen in the second half of next year.
