Global Supply Chain Pressure Index: Explained
- The Global Supply Chain Pressure Index is a new measure created by the Federal Reserve Bank of New York.
- The index assesses the global supply chain using transportation and manufacturing data.
- Data shows that supply chain pressure has skyrocketed during the pandemic, but is starting to ease.
If you’ve been waiting weeks or months for furniture deliveries, can’t find your favorite items on store shelves, or live near the coast and have noticed container ships lined up to enter ports, you you’ve probably realized that global supply chains are under stress.
But how serious is the problem and how does it compare to other periods like the global financial crisis of 2007-2009? A new index, called the Global Supply Chain Index, from the Federal Reserve Bank of New York aims to answer these questions.
What is the Global Supply Chain Strain Index?
The Global Supply Chain Pressure Index (GSCPI) is a new measure of supply chain conditions, created by the Federal Reserve Bank of New York. The index combines variables from several transportation and manufacturing indices, such as those related to delivery times, prices and inventories.
The index is intended to help policymakers, businesses and consumers understand the state of global supply chains.
The following data is used to create the GSCPI:
- Baltic Dry Indexmeasuring the costs of shipping raw materials around the world
- Harpex Indexmeasure container shipping prices
- U.S. Bureau of Labor Statistics (BLS) Import/Export and Inbound/Outbound Air Cargo Indicesmeasuring air freight prices to and from the United States
- Purchasing Manager Index (PMI) surveys, providing economic insights from senior private sector executives. The GSCPI specifically uses PMI data from seven markets: the Eurozone, China, Japan, South Korea, Taiwan, the United Kingdom and the United States. And the GSCPI specifically uses the following PMI subsets: Delivery delay“which captures the extent to which supply chain delays in the economy impact producers,” explains the New York Fed; Arrears, looking at the volume of orders that organizations have received but have not yet been able to process; And shares purchasedwhich is an inventory measure.
PMI data dates back to 2007, so to construct the GSCPI of previous years, the New York Fed used the Institute for Supply Management (ISM) manufacturing survey.
The GSCPI “subtracts demand factors like the part of longer shipping delays that result from greater consumer demand for goods,” says Ayeh Bandeh-Ahmadi, senior economist at Transfix, a freight software provider. .
“It really allows businesses to isolate and understand how logistics challenges play a role in trade, inflation, or other global business trends,” Bandeh-Ahmadi adds.
“You can also use the index with data on the demand or supply of specific goods,” says Bandeh-Ahmadi. “So it’s like what the Fed does when they use the index with oil supply and demand to compare and gauge which one has the biggest impact on inflation or other factors that affect them. interest.”
How to use the GSCPI
The New York Fed index shows how pressures on the global supply chain vary from the average. When the index is high, it means there is more pressure on the supply chain than usual. When it’s low, there’s less pressure.
The index dates back to 1997 using historical data and is updated monthly. Data is subject to revision, as changes may affect readings up to one year ago.
The GSCPI shows relatively small changes throughout most months measured, through 2020. Before the pandemic, there was never a period that registered more than two standard deviations from the mean.
As New York Fed ratingsthere are some data gaps, including differences in how historical data has been measured, which require estimates.
Some experts believe the index is not useful for business leaders. When supply chain pressures show up in price or congestion metrics, “it’s a lagging indicator of what’s already happened in the world, not a leading indicator of what’s to come.” , says Michael Farlekas, CEO of e2open, a supply chain software company.
“If you’re running a big business, you don’t count on that [index] in any way, shape or form, other than as a confirmation number to triangulate against,” Farlekas says, though it could be a reference tool for politicians.
What are the main supply chain issues?
Many interrelated issues have strained the supply chain since the start of the pandemic. Some of the main issues include:
1. Unusual request
The pandemic has significantly disrupted the traditional balance of supply and demand, and it has taken time to restore this balance. Demand for certain types of physical goods has skyrocketed, while demand for service-oriented products has plummeted, Farlekas says. It took time for suppliers to recover and find the right balance.
“It’s like someone threw a huge boulder into a lake, and it had a big displacement,” he says. “What we see are the ripples of the remnants of this massive event.”
Farlekas thinks it could take up to a year to “smooth out” supply chains, as long as there are no further disruptions.
2. Traffic jam
Not only has the pandemic strained the amount of products manufacturers can produce, but it has also caused transportation congestion. Physical infrastructure has limits, so a massive spike in port traffic, for example, causes congestion.
“You are limited by the physical capacity of the various choke points,” says Farlekas. A company might say, “I have a lot of ships, but I can only unload a limited number of containers, because they can only pass through a limited number of ports. Therefore, I have traffic jams,” explains he.
This was a particular problem around the fall of 2021, Bandeh-Ahmadi notes. “We’ve seen a lot of shippers move their freight from Long Beach [California] to the ports of Savannah [Georgia]or New York or New Jersey and sort of spread that volume out because of that realization that there’s potential for backlogs.”
This issue relates to GSCPI entries such as delivery times, as congestion can increase the time it takes for a product to arrive at its destination.
3. Russia-Ukraine War
More recently, the Russian-Ukrainian war has affected global supply chains in several ways. On the one hand, the war sent shock waves through energy markets, driving up the price of oil. It has also affected the food supply, since Ukraine is a major exporter of crops. These factors affected the cost and availability of goods.
While the New York Fed Ratings that the Russian-Ukrainian conflict has an impact on supply chains, as with delivery times in Europe, the index tries to avoid overlap with other measures.
“Energy prices go into inputs on the supply side, because it costs energy to produce things,” says Bandeh-Ahmadi. “But for the most part, the factors that are in this index are really separate from energy. And that’s why when the Fed wants to gauge how much higher oil prices are driving inflation or other factors, she’ll put it next to that index and assess how those two things compare,” she explains.
Are supply chains improving in 2022?
Despite some twists and turns, supply chains appear to be improving in 2022. The GSCPI shows supply chain pressures easing, particularly since April 2022.
“I don’t think inflation will cause more supply chain issues,” Farlekas says. “I think that will help solve some of the supply chain issues.”
Governments around the world have taken steps to try to alleviate supply chain issues. The Biden administration has implemented fines for empty containers clogging ports, for example. But overall, the problem could be solved with more time.
“We’re still living with the repercussions of quite massive supply and demand shocks” since the start of the pandemic, Farlekas says. “So that’s going to have an effect for a little while. I think we’re probably in the final third.”