Supply chains inching back to normal brace for headwinds of softer demand

Supply strains, while still afflicting many consumers and businesses, are becoming more mundane than menacing like they were six months ago, especially in the US. Snarls have eased back from their pandemic peaks and some are already adding less inflationary pressure. Modest improvements are showing up in gauges maintained by forecasters ranging from Bloomberg Economics to the Federal Reserve Bank of New York. But the gradual end of the pandemic-driven supply crunch might give way to another potential headache: a slump in consumer demand that throws economic growth into reverse and leads to an ugly inventory pileup.

“Pressures in the global goods sectors, which have been a central driver of inflation, may finally be easing,” Citi economists led by Nathan Sheets wrote in a research note this month. “The bad news is that this looks to be occurring on the back of a slowing in the global consumer’s demand for goods, especially discretionary goods, and thus may also signal rising recession risks.”

Citi cautioned against declaring an “all clear” on the supply front. 

Controlling some levers of economic activity is the Federal Reserve, which is set to raise interest rates later this month to try to curb surging inflation. According to its most recent regional survey, businesses are dealing with plenty of supply problems but they seem to be fading in severity.

Another indicator of emerging supply slack: Ocean freight rates have continued their decline from record highs. And the fact that it’s happening during what’s usually peak season for global shipping leads some observers to conclude that a market that lacked any excess capacity just a few months ago is rapidly swinging back.