The Supply Chain Matters blog highlights February global manufacturing and supply chain indices and challenges relative to product demand and supply network imbalance levels in the first quarter of 2022.
Global wide production, transportation and logistics activity levels reported for February, but continued rather concerning data related to global transportation service levels and cost. Optimism is reflected in United States, Eurozone and select Asia data and the traditional Lunar New Year holiday period does not appear to have dampened Asia based production levels for February.. The threat of new waves of the COVID-19 variant spread among emerging region manufacturers remains of concern as is continuing input cost inflation.
Commentary related to January’s PMI and logistics data can be accessed at this web link.
Global Wide Production Activity
The J.P. Morgan Global Manufacturing PMI® report, a composite index produced by J.P. Morgan and IHS Markit was headlined as a mild uptick in the rate of expansion as global wide growth, output, new orders and employment indices all strengthened.
Specifically noted by the authors: “The increase in new business was the weakest registered for one-and-a-half years, in part reflecting the drag of the first decrease in international trade volumes since August 2020.” That stated, the report noted that panelists indicate that the outlook for global manufacturing remains positive overall. This index’s February value of 53.6 was 0.2 percentage points above the 53.2 value reported for January.
Data reported reflected expansion among consumer, intermediate and investment goods industries. Of the data from 25 nations covered in this February report, 22 of these nations registered readings above the 50.0 expansion
Accompanying report commentary from Olya Borichevska, Global Economist at JP Morgan included words of caution: “However, the darkening geopolitical backdrop and subsequent demand headwinds are likely to pose significant risk in the weeks ahead. This is also true with regard to the outlook for prices, with input cost and output charge inflation both accelerating in the latest month.”
Global Supply Chain Pressures Index
A relatively new index is The Global Supply Chain Pressure Index (GSCPI), developed by a group of researchers at the U.S. Federal Bank of New York. This index complies a data set of 2 chosen variables for each of the economies of the Eurozone, China, Japan, South Korea, Taiwan, the United Kingdom and the United States.. This index is normalized in that a value of zero indicates the index is of average value, while positive values represent how many standard deviations the index is above the average value. The reported global-wide value of this index was 3.31 for February, with the authors indicating that this value: “reflected an easing in global supply chain pressures since December 2021, even though they remain at historically elevated levels” The February index value compares to the 4.25 value reported at the end of December 2021.
Select Region Highlights
Indices reflecting manufacturing across the United States were generally positive. The IHS Markit Manufacturing PMI™ reported a value of 57.3 for February, up from 55.5 reported for January. This report’s headline was output growth increasing amid stronger demand and easing supply disruption. The February 2022 Manufacturing ISM© Report on Business reported a value of 58.6, one percentage point higher than January’s level of 57.6. This report’s commentaries observed: “The U.S. manufacturing sector remains in a demand-driven, supply chain constrained environment. The COVID-19 omicron variant remained an impact in February, however there were signs of relief, with recovery expected in March.” The Prices index declined 0.5 percentage points after increasing 7.9 percentage points in January. The New Orders index was reportedly up 3.8 percentage points offsetting a decline of 3.1 percentage points in January. The Backlog of Orders index increased 8.6 percentage points on top of a 6.4 percentage point increase reported in January.
The IHS Markit Eurozone Manufacturing PMI® declined to a value of 58.2 from a value of 58.7 in January. Commentary pointed to a largely positive February with demand for goods trending higher. Supplier delivery times reportedly improved.
With the occurrence of the Lunar New Year and Tet New Year holidays occurring into February, all eyes were on the indices of key Asia based regions
Surprisingly, the two recognized gauges of China’s manufacturing activity both reflected growth in manufacturing activity levels compared to prior periods. The official manufacturing PMI compiled by the country’s Bureau of Statistics, inched higher to a value of 50.2 for February, slightly higher than 50.1 reported for January. The Caixin China General Manufacturing PMI®, which is generally weighted toward smaller private manufacturers, reportedly rose 1.3 percentage points to a value of 50.4 in February. Report authors indicated that overall manufacturing activity expanded, supply recovered while demand clearly improved. Inflationary pressures reportedly remain a concern.
A country of continued optimism remains that of Vietnam, which has been the go-to country for businesses seeking to manage supply network risk exposure in China. The IHS Markit Vietnam Manufacturing PMI® rose again to a level of 54.3 for February, up from 53.7 reported for January. Commenting on the February data, Andrew Harker, Economics Director at IHS Markit noted in part: “Firms all still having difficulty enticing workers back to factories in large enough numbers to keep on top of workloads, while raw materials remain scarce. Manufacturers will therefore be hoping for these constraints ease in the month ahead and unleashing production in the process.”
Global and Domestic Transportation and Logistics Indices
The World Container Index, assessed by Drewy Consultants, is a compilation of eight major shipping routes to and from the United States, Europe and Asia. The value of that index as of this posting was $9,279.46 per 40-foot container, noted as 2.1 percent weekly decrease, and remaining 81 percent higher than year ago levels. This index stood at $9,304 at the end of 2021. For the specific routing of Shanghai to Los Angeles, the index was reported as $10,986, representing a 158 percent year-over year increase.
The Flexport Ocean Timeliness Indicator tracks average ocean container shipping transit times. Data published at the end of February indicates that for movement of ocean container shipping transit from Asia to North America, the average time had declined to 106 days, upwards of 15.1 weeks. The index that tracks ocean container movement from Asia to Western Europe increased by four days to 110 days. In February, a new Stage I Measure was introduced, which tracks that average period from cargo ready to origin port departure. For this report’s average of the four weeks to February 27, 2022, the Stage 1 Measure for both westbound and eastbound movements reportedly worsened.
The Logistics Managers Index Report®, compiled by researchers at Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University and the University of Nevada Reno, and in conjunction with the Council of Supply Chain Management Professionals (CSCMP), reported a February 2022 value of 75.2, noted as the second highest in the history of this index. It was further noted as being 13 consecutive months of index readings over 70.0 which are classified as significant expansion. Of particular concern was the Inventory level index, which rose 9.1 percentage points to 80.2 to an all-time high. Specific commentary from the report authors observed: “Now it seems that a combination of over-ordering to avoid shortages, late-arriving goods due to supply chain congestion, and a softening of consumer spending has created a logjam, Inventory Levels a full 21.4 points higher than they were in November.” A spillover index of Inventory Costs reached a reported all-time peak of 90.3.
Supply Chain Matters Insights and Perspectives of the February 2022 Data
While global indices related to procurement and production activity across global regions for February reflect some optimism in the numbers, uncertainties loom large. The most significant is the Russia-Ukraine conflict and the subsequent implications, which our growing concerns with many implications yet to be determined. One area of major concern is the effect and duration of much higher energy prices globally along with the ultimate implications of heightened economic sanctions on Russia. Thus, February’s data is a point in time, and as the past two years has depicted, more significant and far-reaching events re occurring.
Global transportation, cost and service level indices remain very concerning with continued implications relative to added disruption and costs. The LMI inventory index is perhaps the most concerning given that there is still inventory to be unloaded from clogged ports. That data reinforces belief that indeed, a significant bullwhip of inventory ordering activity may well be a significant challenge for at least U.S. manufacturers, retailers, wholesalers and importers if market product demand levels drop significantly. With U.S. interest rates expected to climb significantly in the coming months, inventory carrying costs will present an added cost burden.
As noted in our prior commentary, the bottom line remains that much work remains in the coming year in reexamination of existing practices in areas of supply network resiliency, cost inflation mitigation, added agility in logistics and transport networks and other dimensions.
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