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What's Behind Firms' Reported Improvements in Meeting Demand?

Regional Matters
July 14, 2022

According to special question results from our most recent monthly business survey, Fifth District firms reported improvement in their ability to meet customer demand compared to earlier in the year. Moreover, the majority of respondents said they expect to fully meet customer demand in the next 12 months. Although firms have continued to take action to boost production, softening demand itself may be another reason for the reported improvements.

Firms Report Improvements Meeting Demand

The pandemic and its aftermath severely impacted firms' ability to meet demand. Prior to the pandemic, 63 percent of firms were able to fully meet demand, while nearly every firm met at least 75 percent of demand. Our surveys show that during the pandemic, the percentage of firms able to meet at least 75 percent of demand decreased to 80 percent in September 2021 and then decreased to 73 percent in February 2022. Our June survey, however, showed this share of firms rebounding to 81 percent — though still below pre-pandemic levels.

Firms expect that their ability to fully meet demand will further improve in the near future. Nearly 2-in-3 firms expect to fully meet demand in the next 12 months, whereas half of firms expect to fully meet demand in the next six months.

Firms Continue to Take Actions to Address Labor and Supply Chain Constraints

Our June survey showed that the availability of labor continues to be the top issue constraining firms' ability to meet demand, although it has been easing since September 2021. The other most cited barriers to meeting demand are the availability of inputs and the availability or delays in shipping/freight.

Firms have taken a variety of actions to boost production. About 2-in-3 firms have raised wages for hard-to-fill jobs, and over half of firms have engaged in new methods to recruit workers. Additionally, 1-in-3 firms have diversified their supply chains, and a similar proportion of firms have increased inventories.

Do These Actions Explain Improvements in Meeting Demand?

Although firms are taking action to increase production, this survey indicates that they have not significantly changed tactics since February. This raises the question: Why can firms now better meet demand? One explanation is that the work firms have done to boost their workforce and improve their supply chains is paying off. Although this might have some truth, the labor market is just as tight now as it was in February, and our firms are still reporting challenges finding the necessary workers. Additionally, the New York Federal Reserve's Global Supply Chain Pressure Index continues to show that supply chains are strained and our firms generally report that while pressures have eased some, they still struggle to get the inputs that they need for production or service provision.

Another explanation is that demand itself is softening. Results from our June business surveys show growth in demand slowing for an increasing share of firms across our district. Both the service sector and manufacturing sector survey's diffusion index for demand and new orders reached some of their lowest points since the start of the pandemic. Additionally, more firms are citing deteriorating local business conditions compared to the previous month, and they don't expect conditions to improve in the next six months.

In summary, firms reported in our June survey that they are better able to meet demand than earlier in the year. They have been proactive in finding ways to boost production by increasing their workforce and rethinking supply chains. While firms have been working hard to increase production, softening demand may also explain some of the catch-up in supply.

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