The indisputably good force behind the supply chain nightmare đźš›

It's fanning inflation. But it's a good thing.

One of the most telling economic indicators is suppliers’ delivery times. They represent the amount of time between a business placing an order for stuff and when that stuff eventually gets dropped off.

Longer delivery times are a pretty reliable predictor of inflation heating up. It’s also a sign that demand in the economy is robust.

According to a new report from IHS Markit, these delivery times are the longest on record.

This isn’t exactly breaking news. There are headlines and images about supply chain bottlenecks everywhere. And TKer subscribers got updates on inflation surges here and here.

But it’s worth stressing the indisputably good economic force that got us here: demand.

Demand is a high-quality problem

When the line for a bar is going around the block, the bar owner isn’t struggling. Maybe she wished she had a bigger space and more staff to handle the volume. But at least she doesn’t have an empty bar. Though she’ll probably charge more for drinks.

This is what’s going on with the world’s gummed up supply chains.

While labor shortages are certainly a part of the problem, it’s overwhelmingly about a boom in demand.

There are many indicators that confirm this boom. I’ll share a few glaring ones.

Personal consumption expenditures, aka consumer spending, is running at a record annualized pace of $15.9 trillion. And consumer spending represents about 70% of GDP.

This doesn’t appear to be a flash in the pan. Consumers are in better financial shape now than they were before the pandemic. They’re still sitting on over $2 trillion in excess savings they accumulated since the beginning of the pandemic.

On one hand, some will argue it’s concerning that consumers haven’t unleashed more of those savings. On the other, if they were spending more aggressively, inflation might be a lot higher!

Businesses are betting on themselves

Another informative indicator of the economy comes from the Census Bureau’s monthly durable goods orders report. A durable good is basically anything you’re not eating or planning on throwing out after a couple of uses.

In the report, there’s a measure called “nondefense capital goods excluding aircraft.” Informally known as “core capex,” orders for these goods are considered a proxy for business investment.

One analyst described the recovery in core capex orders as “remarkable.”

Sure, some of this can be explained by businesses making up for the lack of investments they made during the onset of the pandemic.

But why invest so much if you think business will go sideways in the years to come?

To be sure, this isn’t just robots replacing humans. Yes, companies have accelerated technological investments to make operations more efficient. But companies also have an eye-popping 10.4 million job openings listed; that’s 1.2 job openings per unemployed person.

In other words, businesses expect more demand, and they’re hiring to boot.

The kinda, sorta big risk

When there’s more demand than there is supply, the folks with more money will be willing to pay more to get their stuff first, and businesses will be happy to charge more.

Chris Williamson, chief business economist at IHS Markit, articulated how this is currently unfolding all along the supply chain.

…while manufacturers also continue to report strong demand, factory production remains plagued by constraints, including record supply chain bottlenecks and labor shortages. Prices paid by factories for raw materials rose at yet another new record pace as a result, in turn feeding through to both higher prices at the factory gate and spilling over into higher service sector prices. Higher wages are also having to be offered to attract or retain staff, adding to the inflationary pressures.

Thus, while the economy looks set for stronger growth in the fourth quarter, the upward rise in inflationary pressures also shows no signs of abating.

By the way, these supply chain bottlenecks are happening all around the world.

It could be a lot worse

The global supply chain is under a lot of pressure. But this is the result of a lot of positive things happening in the economy.

It would be one thing if the supply chain issues were hindering a stagnant or slowing economy. But the evidence clearly shows it’s actually just moderating a booming economy.

Also, we have policymakers who have tools to rein in inflation should things get a little too hot. For more on that, read: There Are Worse Things Than Inflation.