How companies like General Mills, Ford, Amazon, and others are adapting.

As we celebrate the start of another year, we are looking ahead at the economic trends that will shape businesses in 2020. The past two years have been anything but status quo thanks to the COVID-19 pandemic and 2022 will likely follow suit. Ongoing supply chain issues, inflationary pressures, and worker shortages are just some of the factors that will shape the economic outlook in 2022.

2022 ECONOMIC TREND #1: SUPPLY CHAIN CHALLENGES

International supply chains have been in turmoil since the pandemic began almost two years ago. During the initial few months, major factories in “places like China, South Korea, Taiwan, Vietnam and Germany” were especially impacted by the virus. Many manufacturers were forced to either close or severely reduce production levels to meet new health guidelines. In response to these developments, “shipping companies cut their schedules in anticipation of a drop in demand for moving goods around the world.” In hindsight, this was a miscalculation. Many consumers shifted their extra finances away from services, which were closed due to pandemic restrictions, and redirected their paychecks towards physical goods. Consumers spent the most on household items like office chairs, printers, workout machines, and video game consoles. The decrease in production and shipping, combined with a pandemic-induced worker shortage and surging consumer product demand, meant that space on any trans-pacific cargo ship was at a premium. “Before the pandemic, sending a container from Shanghai to Los Angeles cost perhaps $2,000. By early 2021, the same journey was fetching as much as $25,000.”

There is hope on the horizon however. “In Asia, Covid-related factory closures, energy shortages and port-capacity limits have eased in recent weeks.” Some shipping and retail experts predict U.S. port backlogs will begin to clear in “early 2022”. Ports will be able to catch up and work through the existing backlog after the US holiday rush while many factories are closed for Chinese New Year. For some companies, shipping prices have already begun to fall. In mid-November, “the cost to move a container across the Pacific fell by more than a quarter.” It represents “the biggest decline [in price] in two years.” Despite the decline, prices are still very high. It still costs roughly $14,000 for a 40-foot container across the Pacific, which is “still more than three times’ higher than prices one year ago.

HOW BUSINESSES ARE ADAPTING IN 2022

As global supply chain issues begin to recede in 2022, many executives are actively looking for opportunities to diversify and strengthen their supply chain to mitigate future risk. According to a recent report by the supply-chain automation platform Centersource, “roughly 23% of the companies have already diversified over the last year, with another 33% saying it is highly likely they will diversify in the near future.”

We are already beginning to see some signs of this massive shift towards supply-chain diversification with the announcements like new semiconductor factories in the United States. In late November, “Samsung said it plans to build a $17 billion semiconductor factory outside of Austin, Texas, amid a global shortage of chips used in phones, cars and other electronic devices.” Although the plant will not start production until 2024, it represents a step towards alleviating the long-term global chip shortage, which has affected everything from car manufacturing to household appliances.

In a similar move, Ford announced a new strategic partnership with the semiconductor giant, GlobalFoundries, last month. Ford hopes “to accelerate the next wave of innovation in automotive chip design.” This partnership will also diversify Ford’s existing supply chain, which has been severely strained by the pandemic. In recent months, Ford has been forced to park “thousands of F-150s until it can install chips in the trucks and ship them out to dealers.” Jim Farley, Ford’s CEO, noted, “It’s critical that we create new ways of working with suppliers to give Ford…greater independence in delivering the technologies and features our customers will most value in the future.”

Not every company has the same amount of influence as Ford or Samsung. Smaller businesses have been especially hurt by supply chain issues. DPS Skis, a ski manufacturer headquartered in Salt Lake City, has traditionally sourced the wooden cores for its skis from China; however, with rising shipping costs, DPS Skis was forced to look for another supplier. In a recent interview, Alex Adema, the company’s Chief Executive, said DPS Skis would be shifting away from China and other long-distance suppliers in an attempt to shorten their supply chain. DPS Skis has begun sourcing the wooden cores from a supplier in the United States. Mr. Adema said, “We’re excited about getting the wood from North Carolina in terms of sustainability and less environmental imprint. Any time you can throw something on a train in the U.S., it’s better than a ship or plane.”

The reality of the situation is, it will take time to fix these bigger issues. Experts are not sure when supply-chain bottlenecks and production slowdowns will be completely fixed, but “there are good reasons to suspect that [lingering issues] will be with us well into 2022 and maybe longer”so it is wise for companies to start diversifying supply chains now.

2022 ECONOMIC TREND #2: INFLATIONARY PRESSURES

The cost of goods and services in the United States from October 2020 to October 2021 has risen by 6.2 percent. Food costs have similarly increased by 5.3%. “The rising U.S. inflation rate is triggering a debate about whether the country is entering an inflationary period similar to the 1970s.” There are conflicting opinions about whether this season of inflation is temporary or a new permanent fixture of American life.

In a recent congressional hearing, Fed Chairman Jerome Powell said, “We tend to use [transitory] to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” He noted that ‘“factors pushing inflation upward will linger well into next year.” Because the US has been experiencing increases in “sticky” categories like wages and rents, the effects of inflation may stick around after the supply-chain bottlenecks are a distant memory. Inflation will likely level off and potentially even decrease in some categories during 2022, but economists predict that the U.S. will continue to deal with inflation for another six months at least. Economists are uncertain where the rate will settle, but they agree it will likely not return to the U.S. pre-pandemic average of 2%, which could pose problems for the economy moving forward.

HOW BUSINESSES ARE ADAPTING IN 2022

Over the past year, many businesses have been “struggling to keep up with their own costs.” Many industries have faced increased labor costs and dramatic rises in shipping/logistic costs during the pandemic. As a result, many companies have been forced to pass along these increased prices to consumers.

General Mills is the maker of popular brands like Cheerios, Pillsbury, and Häagen-Daz. In a recent interview, the CEO, Jeff Harmening, said, "The inflation is broad-based, we see it in grains and logistics not only here in the U.S., but also globally. Fortunately we have good productivity programs and are looking for some pricing to put in place. We have the tools we need in order to battle it, but we are starting to see inflation as are most of our competitors." According to industry experts, General Mills will be implementing major price increases. CNN reported that prices of some items will “go up by around 20% beginning next year.”

Major companies like Tyson, Kraft Heinz, Mondelez, Procter & Gamble, Kimberly Clark have announced similar price increases beginning in 2022.

2022 ECONOMIC TREND #3: WORKER SHORTAGES

The U.S. worker shortage might be the biggest trend set to shape 2022. Coined “the great resignation” by some media outlets, this worker shortage will continue to impact almost all aspects of life in the United States. According to the Bureau of Labor Statistics, over 500,000 people have quit their jobs to “strike out on their own as consultants, retailers and small-business owners.” This has dramatically changed how many major corporations work to attract new employees. A number of major corporations, including Apple, Shopify, and Microsoft, have announced plans to permanently offer hybrid or remote work schedules.

More broadly, a record 4.4 million people have resigned from their jobs. Hiring has increased at record levels, but it has left a massive shortage of workers in many industries. Many businesses are struggling to fill vacant spots and find hourly workers in the service, shipping, and logistics industries. Truck drivers and restaurant workers are in especially high demand right now. Some companies have been forced to shorten hours or even close due these shortages.

Despite a large number of available positions, the labor force participation rate, which is a way to measure “those working or seeking work against the total population of working age,” is still surprisingly low. The labor force participation rate currently sits at 61.6%, which is “1.7 percentage points below its pre-pandemic level.” The decline in labor force participation “is being fed almost exclusively by married people living with a spouse who left the labor force in the late summer of 2020 and did not return.”

HOW BUSINESSES ARE ADAPTING IN 2022

Major corporations are starting to offer large benefits packages and higher salaries in an attempt to attract and retain employees. Earlier this year, Sheetz, an American gas station and convenience store chain, announced it would “raise the hourly rate of all of its 18,000 employees by $2.” This decision will boost entry-level hourly wages to $15.50. In September, Amazon announced it would move the average starting salary to $18 per hour, with some locations offering a $3,000 signing bonus. CR England, a major U.S. trucking and logistics company, “announced its largest driver-pay raise in its history and its third pay hike in three years.” The company says trucker salaries have increased by over 50% since 2018.

Analysts say workers will gradually return to the workforce; however, this worker shortage will not be solved overnight. It is an economic reality that will continue to constrain growth in 2022.

If you’re struggling to overcome international supply chain challenges or build a business development plan to drive long-term growth, we can help. Click here to schedule your free consultation today.