The Fed Board has published a FEDS note titled “Quantifying Bottlenecks in Manufacturing” by Charles Gilbert, Maria D. Tito, and Cynthia Doniger.
What the paper does. Using Census data, the paper develops a new methodology to quantify bottlenecks in the manufacturing sector based on the relationship of unfilled orders and inventories relative to shipments. The intuition is the following. In normal times, unfilled orders and inventories each tend to exhibit a constant long-term relationship relative to shipments (orders have typically translated into shipments within 2-to-5 months, and an inventory drawdown associated with a rise in demand has boosted output in the following 1-to-2 months as manufacturers restock depleted warehouses). Therefore, this long-term relationship can be used to construct a counterfactual (that is, how things would have turned out without bottlenecks). The deviations of unfilled orders and inventories from their long-term relationships with shipments can be seen as the bottleneck effect (lost output) across industries in manufacturing.
Results. The authors estimate that supply chain bottlenecks held down production growth, on average, 0.2 percentage point per month over the first half of 2021 (in 2020 no bottlenecks are observed in the data; rather, in 2020 the supply-side issues were due to “disruptions” -that is, to negative supply shocks- and not to “bottlenecks” -that is, supply not growing fast enough to meet additional demand). The results of the analysis point to a deterioration in the effect of supply constraints through May 2021 before showing some signs of improvement starting in June. Even so, growth in the manufacturing sector (excluding motor vehicles) in September was about 0.6 percentage point below what it would have been in the absence of any constraints (see Figure 2 from the paper reported here below).
Figure 2 from the paper
Comment. Interesting analysis because it quantifies the extent of the supply-side issue in manufacturing (ex-motor vehicles). The authors’ results suggest that the situation has deteriorated until May; then, the evidence points to some improvements. Nevertheless, at the current rate it would probably take another few months to fill orders.
Implications for the Fed staff. The Fed staff inflation forecast seems to assume that supply will come back strong in 2022, especially in the second half. Overall, the FEDS note is a confirmation that, at least to some extent, supply bottlenecks have finally started to improving. However, it seems that an acceleration going forward will be necessary to put some downward pressure on consumers prices, given that we have not seen any so far.