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Editorial

The Supply Chain Is Improving. Will the Economy Follow?

3 minute read
Alex Kantrowitz avatar
Inflation surged partly thanks to a broken supply chain and skyrocketing shipping costs. Are things getting back to normal?

In May 2021, a shipping source told me to expect inflation. His cost to ship containers from China to the U.S. had jumped from $2,000 pre-pandemic to $20,000. So companies selling imported goods — from clothing to food — would soon pass that 10x increase to us. He planned to do his holiday shopping early.

He nailed it. Inflation seemed like a faraway fear at the time. (And I mistakenly buried the inflation warning in a story about Amazon sellers’ increased costs.) But what the shipping industry saw quickly translated into broader pain. Inflation reached 8.6% this May. The Federal Reserve’s rate raises to restrain it guided the S&P 500 into a bear market. And now, to restore price stability, the Fed appears ready to induce a recession.

I was, therefore, thrilled when the same shipping source told me his $20,000 import costs had recently dropped to $8,000. As long as inflation persists, our economy will be unstable. And so, with this leading indicator heading back toward normal, it seemed like we might too. Possibly, at least.

The Good News

The good news is that shipping rates are indeed falling globally, and the supply chain is righting itself. Flexport, a tech-enabled freight forwarder, has seen rates drop from highs of around $20,000 per container to $10,000. And Dave Lissman, a sales manager at importer Port Royal Sales, said he was finally seeing some easing after a long period of pain.

“As of recently,” he said, “there has been some slight room for negotiation.”

Also encouraging is that Flexport has seen a 35% reduction in shipping transit times, according to Anders Schulze, its global head of ocean and trucking. So those long waits for living room furniture might start abating. And now that congested ports are loosening up, prices might fall further as idle ships come back into service.

”It's still much higher than historical averages,” Schulze said. “But it's pointing down, which is exciting.”

Related Article: VC Firms Are Still Spending Like Drunken Sailors

Learning Opportunities

Reason for Caution Still

While rising shipping costs were indicative as prices rose, it’ll likely take more than falling rates to fix the system. The broken supply chain was part of the problem, but more significant issues persist. Generous government stimulus, for instance, helped generate massive demand for goods — which stressed the shipping system and sent prices upward — and that hasn’t abated yet. Durable good consumption is still up 20% over February 2020, according to Flexport’s chief economist Phil Levy, a dropoff from a 35% increase we saw in 2021, but still pretty high.

“We were overheated,” Levy said. “It’s starting to back off somewhat.”

It will thus likely take some time for inflation to resolve. But when you consider these supply chain improvements combined with the falling costs of wheat, gas, and inputs like copper, you can see a scenario that’s more optimistic than recent headlines suggest.

For the first time in years, the people who first saw these issues are exhaling a bit, even if their good news comes with a caveat.

“I'm gonna wait,” said Flexport’s Schulze of his holiday gift-buying plans. “But that's probably also driven by the fact that I'm typically a last-minute shopper.”

About the author

Alex Kantrowitz

Alex Kantrowitz is founder and reporter at Big Technology, author of "Always Day One: How the Tech Titans Plan to Stay on Top Forever," an on-air contributor at CNBC and former senior technology reporter at BuzzFeed News.

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