New Fed Index Suggests Supply Chain Pressures May Be Leveling

A new “barometer of global supply chain pressures” from the Federal Reserve Bank of New York suggests that “global supply chain pressures, while still historically high, have peaked and might start to moderate somewhat going forward.”

If so, it would ultimately be good news for the economy. However, whether there would be significant near-term help for commercial real estate is less certain.

Here’s how the New York Fed describes the index, which it calls the Global Supply Chain Pressure Index, or GSCPI:

“To estimate our GSCPI measure, we thus have available a data set of twenty-seven variables: the three country-specific supply chain variables for each of the economies in our sample (the euro area, China, Japan, South Korea, Taiwan, the U.K., and the U.S.), the two global shipping rates, and the four price indices summarizing airfreight costs between the U.S., Asia, and Europe. All these variables are corrected for demand effects to the greatest possible extent, as described previously.”

As CNBC notes, the metric “combines several of Wall Street’s favorite supply-chain measures into one integrated too.”

The New York Fed combines the data and then normalizes them. The result is monthly numbers in which zero represent the average index value over time (suggesting that the average can and will change, so the average of two months ago might differ from the current one).

Non-zero numbers indicate standard deviations away from the average: positive values being standard deviations above average and negative values, standard deviations below average.

Among the components, the Fed noted that container shipping rates grew faster than during the Global Financial Crisis recovery. Shipping of commodities such as coal or steel rose more in line with during the GFC recovery. Airfreight costs jumped sharply in 2020 as airlines cut their capacity in response to the pandemic.

The news is good in some respects. Transportation costs and delivery times have a significant impact on overall costs and availability. Improvement here lessens pressure from all industries, including real estate.

But the effect may be limited when it comes to CRE as construction goes. Transportation costs and speed don’t matter so much if the raw goods still aren’t available. Lumber prices have continued up as have other building commodities, such as structural iron and steel, cement and concrete, and HVAC equipment.

“At today’s lumber market prices, the cost of logistics is irrelevant,” Mike Wisnefski, CEO of MaterialsXchange, tells GlobeSt.com. “If the availability of space was the issue, then the supply would be constrained, adding fuel to the already hot market.”

And then there’s the labor shortage that has weighed heavily on the industry. Even if you can get hold of the materials today, you need people to put them together. Hopefully the Fed is right. Now if the rest of the landscape can catch up.