The Global Supply Chain Pressure Index is updated monthly by experts at the Federal Reserve Bank of New York.
Luis Alvarez/Getty
The Global Supply Chain Pressure Index is a new measurement created by the Federal Reserve Bank of New York.
The index evaluates the global supply chain using transportation and manufacturing data.
The data shows that supply chain pressure skyrocketed during the pandemic but is starting to ease.
If you’ve been waiting weeks or months for furniture deliveries, can’t find your favorite items on store shelves, or live near the coast and have noticed container ships lined up to get into ports, you’ve probably realized that global supply chains are under stress.
But how bad is the problem, and how does it compare to other periods like the 2007 to 2009 global financial crisis? A new index, called the Global Supply Chain Index, from the Federal Reserve Bank of New York aims to answer these questions.
What is the Global Supply Chain Pressure Index?
The Global Supply Chain Pressure Index (GSCPI) is a new measurement of supply chain conditions, created by the Federal Reserve Bank of New York. The index combines variables from several indices in transportation and manufacturing, such as those related to delivery times, prices, and inventory.
The index is meant to help policymakers, businesses, and consumers understand the state of global supply chains.
The following data is used to create the GSCPI:
Baltic Dry Index, measuring raw material shipping costs around the worldHarpex Index, measuring container shipping pricesUS Bureau of Labor Statistics (BLS) Import/Export and Inbound/Outbound Air Freight Indices, measuring air freight prices to and from the USPurchasing Manager Index (PMI) surveys, providing economic insights from senior executives in the private sector. The GSCPI specifically uses PMI data across seven markets: the Euro area, China, Japan, South Korea, Taiwan, the UK, and the US And the GSCPI specifically uses the following PMI subsets: Delivery times, “which captures the extent to which supply chain delays in the economy impact producers,” the New York Fed explains; Backlogs, looking at order volume that organizations have received but have not been able to complete yet; And purchased stocks, which is an inventory measure.
PMI data goes back to 2007, so to construct the GSCPI for earlier years, the New York Fed used the manufacturing survey from the Institute for Supply Management (ISM).
Important: The GSCPI tries to isolate what’s happening on the supply side of the equation, rather than looking at demand factors, to get a more accurate estimate of the state of supply pressures.
The GSCPI “subtracts out demand factors like the portion of longer shipping delays that are resulting from greater consumer demand for goods,” says Ayeh Bandeh-Ahmadi, principal economist at Transfix, a freight software provider.
“It really lets businesses isolate and understand how much logistics challenges are playing a role in trade, inflation, or other global business trends,” Bandeh-Ahmadi adds.
“You can also use the index together with demand-side data or the supply of specific goods,” Bandeh-Ahmadi says. “So this is like what the Fed does when it uses the index together with oil supply and demand to compare and evaluate which one is having a bigger impact on inflation or other factors of interest to them.”
How to use the GSCPI
The New York Fed’s index shows how global supply chain pressures vary from the average. When the index is high, that means there’s more supply chain pressure than usual. When it’s low, there’s less pressure.
The index goes back to 1997 using historical data and is updated monthly. The data is subject to revision, with changes potentially affecting readings up to a year prior.
The GSCPI shows relatively small changes throughout most of the months measured, up until 2020. Before the pandemic, there was never a period that recorded more than two standard deviations from the average.
Important: Since the pandemic, the index has been highly volatile, though it seems to have peaked in December 2021. Over the past few months, the index has been trending downward, meaning supply chain pressures are easing, though they are still much higher than historical norms.
As the New York Fed notes, there are some data gaps, including differences in how historical data was measured, which creates the need for estimations.
Some experts think the index isn’t useful for business leaders. When supply chain pressures show up in price or congestion measures, “that’s a lagging indicator of what’s already happened in the world, not a forward indicator of what’s going to happen,” says Michael Farlekas, chief executive officer of e2open, a supply-chain software company.
“If you’re running a big business, you would not rely on that [index] in any way, shape, or form, other than as some confirmatory number to triangulate against,” Farlekas says, though it could be a tool for politicians to reference.
What are the biggest supply chain issues?
Many interrelated issues have caused supply chain pressures since the start of the pandemic. Some of the top problems include:
1. Unusual demand
The pandemic significantly disrupted the traditional balance of supply and demand, and it’s taken time to restore that balance. Demand for certain types of physical goods skyrocketed, while demand for service-oriented products plummeted, Farlekas explains. It’s taken time for suppliers to recover and figure out the right balance.
“It’s like somebody threw a massive boulder into a lake, and it had a big displacement,” he says. “What we’re seeing is the ripples of the remnants of that massive event.”
Farlekas thinks it could take up to a year to “smooth out” supply chains, as long as there aren’t additional disruptions.
2. Congestion
Not only has the pandemic strained how much manufacturers can produce, but it’s also led to transportation congestion. Physical infrastructure has limitations, so a massive spike in port traffic, for example, causes congestion.
“You are limited by the physical capacity of different choke points,” Farlekas says. A business might say, “I have lots of ships, but I can only unload so many containers, because they can only go through so many ports. Therefore I have congestion,” he explains.
That was a particular problem around fall 2021, notes Bandeh-Ahmadi. “We’ve seen a lot of shippers move their freight from Long Beach [California] to ports in Savannah [Georgia], or New York or New Jersey and kind of spread that volume out because of this awareness that there’s potential for backlogs.”
This issue relates to GSCPI inputs like delivery times, as congestion could increase the amount of time it takes for a product to get to its destination.
3. Russia-Ukraine War
More recently, the Russia-Ukraine war has affected global supply chains in several ways. For one, the war sent shockwaves through energy markets, increasing the price of oil. It has also affected the food supply, since Ukraine is a major crop exporter. These factors have affected the cost and availability of goods.
While the New York Fed notes that the Russia-Ukraine conflict is having an impact on supply chains, such as with delivery times in Europe, the index does try to avoid overlaps with other measures.
“Energy prices go into the supply side inputs, because it costs energy to produce things,” says Bandeh-Ahmadi. “But for the most part, the factors that are in this index are really separate from energy. And that’s why when the Fed wants to evaluate how much rising oil prices are driving inflation or other factors, they’ll put that next to this index and evaluate how those two things compare,” she explains.
Supply chain pressure and inflation
Supply chain pressures and inflation are closely linked, so it’s no coincidence that abnormally high GSCPI readings correspond with inflation levels that haven’t been seen in decades. As supply pressures increase, that can drive up the cost of goods.
The New York Fed’s research shows that GSCPI changes “have had a meaningful impact” on inflation in the US and Euro area. But changes in oil supply have had more impact, the New York Fed notes. And a drop in oil demand early on in the pandemic caused a temporary decrease in inflation.
Are supply chains improving in 2022?
Despite some twists and turns, supply chains do seem to be improving in 2022. The GSCPI shows that supply chain pressures are easing, particularly since April 2022.
“I don’t think inflation will cause more supply chain issues,” Farlekas says. “I think if anything, it’ll help solve some of the supply chain issues.”
Governments around the world have taken steps to try to ease supply chain issues. The Biden administration implemented fines for empty containers clogging up ports, for example. But on the whole, the issue might be solved with more time.
“We’re still living with the reverberations of pretty massive supply and demand shocks” from the onset of the pandemic, says Farlekas. “So this is going to have an effect for a little while. I think we’re probably on the back third of it.”