The Fed Board has published a FEDS note titled “Effects of Supply Chain Bottlenecks on Prices using Textual Analysis”.
Please, find below our review, comment, and possible implications for the Fed Board staff.
To keep in mind
Supply-side bottlenecks are not getting any better. Increases in goods prices are the result of both, higher demand (which accounts for about 40% of the variation) and supply-side issues (remaining 60%). Overall, not good news for the Fed Board staff, given that relative demand remains strong and supply-side issues are going south rather than improving.
What the paper does
The authors use textual analysis of earnings calls from the S&P Global Market Intelligence database to construct firms’ sentiment indexes about demand and supply (bottlenecks) conditions. The analysis covers the period 2017:Q3 to 2021:Q3. The main benefit of this approach is that the authors have very timely data, available before official statistics. Also, the authors can identify the contributions to price increases of higher demand vs. supply bottlenecks (and what type of bottleneck: shipping, supply chain disruptions, chip shortage, and capacity constraints).
Results
The authors find that around the end of 2020, there was a notable increase in negative sentiment regarding shipping disruptions, consistent with the heavy strain on the world’s transportation system as global demand rebounded strongly. Moreover, after the summer, firms’ negative sentiment regarding supply chain disruptions has deteriorated significantly (in all sectors). Figure 2 of the note (reported for your convenience below) plots the aggregate firm sentiment indexes of supply bottlenecks. As the panel highlights, around the turn of the year, there was a notable increase in concerns (negative sentiment) regarding supply bottlenecks and especially shipping, where the index is more than two standard deviations below its mean. However, since then, the series has continued to deteriorate and the index is now more than three standard deviations below its mean, significantly worse than the depth of the COVID-19 crisis. These results suggest that supply bottlenecks not only persist but that they have deteriorated in recent months.
As a second step, the authors estimate the contribution to prices increases distinguishing between demand vs. supply. In order to do so, they set up a panel econometric model and regress (the change of) their sentiment index for prices on (the change) of their sentiment indexes for demand and supply conditions. The intuition is that if an earning call is mentioning a price increase, it also mentions the source of it (higher demand conditions vas. supply issues). Figure 5 of the paper (reported here below) shows the contribution of demand and each supply bottleneck to price increases. There are two main takeaways. First, the authors estimate that demand has the most significant effect on the increase in price mentions in firms’ earnings calls (about 40% of the total variation is explained by demand). Second, the authors find that supply chain disruptions and chip shortages had the most significant effect among supply bottlenecks on the increase in price mentions in firms’ earnings calls.
Figure 5. Supply and Demand Bottlenecks Estimated Effects
Comment and implications for the Fed staff
Very interesting analysis because it shows that bottlenecks have not improved in recent months (please note that this FEDS note conveys a message which is a bit different compared to another FEDS note published about a month ago according to which there were some positive signs in September). Also, the note is very interesting because it quantifies the contributions to price increases, stressing that demand had a large weight. Overall, the authors’ findings are bad news for the Fed staff because (relative) demand remains very strong and supply side issues will take much longer to solve than previously anticipated. In other words, we reiterate our view that the risks around the Fed staff forecast are clearly skewed to the upside and that our model-based forecast offers a more realistic approach in this moment.