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Supply and Demand: When Will We See Balance?

Regional Matters
February 25, 2022

Fifth District firms continue to struggle to fully meet customer demand for their goods and services. Anecdotally, firms have reported a shortage of raw materials and commodities, increased lead time from suppliers, difficulty finding the transportation for inputs or merchandise, and an absence of available workers. A new measure of global supply chain pressure from the New York Fed shows stress across global supply chains, and nationally, job postings remain at record highs, corroborating anecdotal evidence. These pressures have pushed up prices and contributed to some of the highest inflation measures the United States has seen in decades. Surveys of firms in the Fifth District indicate, once again, that firms do not expect these pressures to go away immediately. For many firms, the uncertainty of the situation makes it impossible to predict when they will be able to fully meet demand for their goods and services.

Firms Struggle to Meet Customer Demand

In our February survey of business conditions that was fielded from January 27 through February 16, firms reported that prior to the pandemic, they were largely able to fill demand for their products and services. Almost all firms reported filling more than 75 percent of demand prior to the pandemic and nearly two-thirds of firms were able to fully meet demand. Currently, however, only 32 percent of firms report fully meeting demand, and that percentage only increases to about 40 percent — well below pre-pandemic — when firms are asked about their outlook for the next six months.

In addition, the share of firms able to meet 100 percent of customer demand declined from September 2021 when we asked a similar set of questions. In September, 38 percent of firms reported meeting 100 percent of demand (compared to 32 percent in February 2022). Meanwhile, a larger share of firms in February (63 percent versus 54 percent in September) were meeting somewhere between 50 percent and 99 percent of demand. In other words, the obstacles Fifth District firms were facing with production and service provision were not removed between September 2021 and February 2022; in fact, the ability to meet demand deteriorated slightly.

Labor, Labor, Labor … but Also Inputs

In both September 2021 and February 2022, firms reported that difficulty finding workers was the number one reason for not being able to meet demand. This is corroborated by conversations with regional businesses — most of whom identify finding qualified workers as a predominant challenge — and the Fifth District index for the availability of qualified workers, which has remained at historic lows for months. But perhaps the reason for firms struggling more to meet demand since September is the growing challenge of finding and paying for inputs and the availability of timely freight services. Compared to September, in February, three times more Fifth District firms reported the rising costs of inputs as a challenge to meeting demand.

There is still a lot of uncertainty around when these challenges will abate. Although 40 percent of respondents expect to fully meet demand in the next six months, 37 percent of firms do not expect to fully meet demand until at least the end of 2023, and another 18 percent are facing too much uncertainty in their environment and operations to predict when they will be able to ramp up production to meet demand. There are very few differences in these expectations between manufacturers and service providers. Nearly 50 percent of firms don’t expect to be able to meet demand by the end of 2022, an indication that labor and supply chain obstacles could last well into 2023 or beyond.

What Are the Ways to Find Labor and Mitigate Supply Chain Disruptions?

Considering that firms most commonly cite labor availability as a challenge, it is not surprising that many firms are trying to attract workers. Two-thirds of respondent firms reported raising wages, and more than 50 percent are exploring new methods of recruitment. Many firms are also asking more of existing employees and automating to reduce the need for labor. On the supply chain side, firms most often report diversifying supply chains and moving away from “just in time” production by increasing inventory, to the extent feasible.

What Does This Mean for Supply and Demand as We Move Through the Year?

Labor shortages and supply chain disruptions (both for firms and their vendors/freight providers) are impacting the ability of businesses to meet customer demand. Nearly every firm in our February 2022 survey has taken some action to mitigate these challenges — from asking existing workers to do more to raising wages to changing structure or location within their production process. Anecdotes range from hotel managers cleaning rooms to grocers installing self-checkouts to manufacturers attempting to increase inventories over the longer term. Once supply and demand even out, will businesses revert to pre-pandemic operations? We do not know the answer, but for now, firms are trying to do more with fewer people, extending lead times, and using innovative solutions to continue operations when inputs are scarce.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.