‘The supply chains are everything at this point,’ economist explains

Tue, Oct 5, 2021, 7:23 AM 4 min read

Supply chain tightness is causing heightened concern over the growth of the U.S. economy while companies mired in trucking and shipping delays scramble to find alternative routes.

"The supply chains are everything at this point," Frances Donald, global chief economist and global head of macroeconomic strategy at Manulife Investment Management, told Yahoo Finance Live (video above). "It's never been harder to create an outlook for the fourth quarter in large part because we have absolutely no clarity on when new supply chain disruptions are going to unwind."

The supply chain situation is highly relevant to understanding the U.S. economy's growth projections, Donald stressed, "because we're at a point where we tend to view supply chain disruptions and higher prices as being inflationary. ... [and] we're at an inflection point where I believe they're going to start to really hamper the growth side of the picture."

If the supply chain crisis pushes costs higher, the Federal Reserve will be constrained to raising interest rates to address inflation, Donald added, "and they need to start focusing on making sure that the fundamentals in the underlying economy remain solid."

Surfers wait for waves at Huntington Beach, California on Setember 25, 2021 as a container ship waits offshore. - A record number of cargo ships have been stuck waiting outside the ports of Los Angeles and Long Beach to have cargo unloaded, amid backups in America's two busiest ports. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images) — Surfers wait for waves at Huntington Beach, California on Setember 25, 2021 as a container ship waits offshore. (Photo by FREDERIC J. BROWN/AFP via Getty Images) · FREDERIC J. BROWN via Getty Images

'Perfect storm' causing supply chain bottlenecks

Given these factors, "there really is a perfect storm going on," Adam Compain, senior vice president at project44, a supply chain technology provider, told Yahoo Finance in a previous interview.

Compain explained the reasons why ports are so backed up and there's red-hot demand for truckers.

"First and foremost is customer expectations have risen only in one direction — and that's up," explained Compain. "Second to that is a capacity constraint. There are limitations to the supply chain network in terms of the quantity of drivers that are available to ship things within the United States and abroad."

As of October 1, 61 container ships are anchored or in drift areas between Los Angeles and Long Beach, and 29 are berthed, the Marine Exchange of Southern California tweeted. As container ships wait for days off the coasts, container fees have correspondingly skyrocketed, according to HSBC and Oxford Economics (chart below).

Shipping costs may be coming down

However, the cost of shipping between the U.S. and China has come down after hitting record highs in early September, according to a report from Caixin, a Chinese financial media outlet.

According to the report, an executive with a Shanghai freight company said that the cost of shipping a container from China to the West Coast has dropped over the last four days from about $15,000 to just over $8,000.

The rate for shipping to the East Coast is down from over $20,000 to less than $15,000, the source added.

And the spot rate, a one-time rate set by current supply and demand characteristics, for shipping to the East Coast had fallen by more than one-quarter from over $20,000 to less than $15,000. Before the pandemic, the rate was generally around $1,500.

A worker checks his truck at PT Coca-Cola Amatil Indonesia's factory in Cibitung, Indonesia's West Java province, February 24, 2011. The Australian-based bottler and distributor for Coca Cola across Oceania had invested AUD$100 million ($101 million) in Indonesia over three years, doubling the company's investment in the country, Business Service Director Bruce Waterfield said during a media tour at the factory on Thursday. REUTERS/Beawiharta (INDONESIA - Tags: BUSINESS FOOD) — A worker checks his truck at PT Coca-Cola Amatil Indonesia's factory in Cibitung, Indonesia's West Java province, February 24, 2011. REUTERS/Beawiharta · Beawiharta Beawiharta / reuters

Meanwhile, companies like Coca-Cola, which generally rely on shipping containers to move its products, have decided on a totally different tack to get goods to America on time.

The company reportedly chartered three bulk carriers that usually transport unpackaged items such as coal and cement to bring its goods over to the U.S., according to a trade publication called The Loadstar.

“When you can’t get containers or space due to the current ocean freight crisis, then we had to think outside the box (or the container),” Alan Smith, Coca-Cola’s procurement director based in Southern Ireland, wrote in a LinkedIn post, according to the publication.

All the supply chain problems do not bode well for consumers, one expert warned.

Stephen Lamar, president and CEO of the American Apparel & Footwear Association, told Yahoo Finance Live on Friday that these cost increases may likely be passed on to consumers in the longer run.

"An average container would be, say, $2,500. We're seeing prices on the spot market for $25,000," Lamar said. "Those price increases, those cost increases — they've got to go somewhere."

"Companies will do their best to absorb them ... but at some point that has to be passed along to consumers," Lamar added.

—

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.