In the battle for economic supremacy, investors should quickly be realizing it’s increasingly about supply, not demand.
Take vehicle giant Volvo. Tuesday it said demand for trucks is strong. The trouble is its own supply-chain constraints are crimping profitability. In the U.S. shale boom, Permian basin operators are encountering congested pipelines and shortages of materials and workers. U.S. railroad companies BNSF and Union Pacific are offering big signing bonuses as freight volumes rise, the latter in part because truck capacity for shipments is tight.
Economic data are also showing a constrained supply side. The Institute for Supply Management’s index measuring backlogs of orders in manufacturing has reached its highest level since May 2004. Set against robust demand, supply chains are “struggling to keep up,” the ISM says.
But it’s increasingly a global phenomenon. In Europe, where the recovery is a couple of years behind the U.S., the IHS Markit purchasing managers index shows delivery times at close to the longest in the survey’s two-decade history. A European Commission survey shows a sharp rise in eurozone businesses reporting labor and equipment as factors limiting production. The Chinese manufacturing PMI also shows rising backlogs of work in recent months, although to a less pronounced extent.
On both sides of the Atlantic, unemployment has already fallen a long way, so greater investment in labor-saving plants and gizmos will be key to keep the supply problems from feeding into prices. Such spending might boost productivity, allowing for higher wage increases and perhaps boosting potential growth, keeping central banks from tightening policy further and faster than markets currently expect.
The increasing focus on supply rather than demand goes hand in hand with the switch in markets to wondering about inflation rather than fearing deflation. The rise of 10-year Treasury yields above 3% Tuesday is a clear sign of the change in mood.
Global tensions could yet weigh on companies’ appetite to invest: confidence in the future is an important factor. But increasingly, the type of spending going on in the economy will count for just as much as the amount being spent.
Write to Richard Barley at richard.barley@wsj.com
Appeared in the April 25, 2018, print edition as 'Supply Starts to Crimp Growth.'