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Labor Scarcity Is a Bottleneck That’s Here to Stay

The supply chain is both on the mend and undeniably broken. That’s the contradiction emerging from the quarterly ritual of companies explaining their earnings results to analysts.First, the good news: Executives broadly agree that transportation logjams are easing and raw material costs moderating. The main impediments now to restoring the supply chain to normal are Covid-zero lockdowns in China and a scarcity of skilled workers in the US.The pandemic awoke the C-suite to the dangers of tying too much of their supply chain to China. This is being immediately addressed with additional sources in other countries. Longer-term, companies plan to shorten supply chains by encouraging suppliers to manufacture in the US or at least in the Americas. This raises the thorny issue of having a fit-for-purpose labor force – something that requires public-private cooperation in education and a rethink of our immigration system.The lack of qualified workers for US factory floors was a topic of concern before the pandemic and now it’s an emergency. It doesn’t take an expert in education to realize that we need more opportunities for vocational training that involve local companies seeking to hire. Even harder is fixing the US’s broken immigration system, which would require a political compromise in Washington.

But these are long-term solutions that won’t address the immediate need for a looser labor market, where unemployment at 3.5% matches a low from 2019 that hadn’t been seen since the 1960s. The Fed is determined to ease conditions by pounding down demand.

``The availability of experienced workers clearly is a catalyst to some of these challenges of supply chains,’’ said Robert Rourke, chief of global industrials for the Chicago-based consultancy L.E.K. ``You’ve got to see the pendulum swing back.’’

So, what does the supply chain look like now?

The semiconductor shortage, which throttled global manufacturing, has eased considerably with demand softening for laptop computers, appliances and electronic gadgets. Vehicle makers, including General Motors Co., are seeing gradual improvement and producing as many vehicles as possible to boost dealership inventory. GM has whittled down 75% of the unfinished autos it had sitting around in June because of the lack of chips, Chief Executive Officer Mary Barra said. She still sees some ``short-term disruptions.’’

Raw material prices are coming back to earth. Aluminum, copper and steel rebar have all declined more than 20% since the beginning of the year. PPG Industries Inc., a Pittsburgh-based maker of glass and protective coatings, expects its inflation to drop in the fourth quarter from the third quarter, even though year-on-year prices are still higher. As Chief Financial Officer Vincent Morales put it: ``We’re starting to see that fever break.’’PPG had absorbed $1.9 billion of raw material inflation since the beginning of 2021. The company plans to cut inventories of ``safety stock’’ since prices have peaked, and transportation is more fluid.It now costs $2,412 to send a 40-foot container from Shanghai to Los Angeles, down from a peak of $12,424 in September last year, according to data from Drewry Shipping Consultants. Trucking rates in the spot market are down about 40% from a year ago.

Harley-Davidson Inc., the Milwaukee-based motorcycle maker, had supply-chain inflation of 2% in the third quarter. That’s lower than 4% in the second quarter and down from 10% in the second half of 2021. The cost deceleration is enabled by ``normalization across logistics, including lower expedited shipping expense’’ and, to a lesser extent, lower raw materials, said CFO Gina Goetter.Newell Brands, which makes a range of well-known consumer products from Rubbermaid containers to Elmer’s glue, expects a ``significantly more favorable cost inflation environment,’’ said CFO Chris Peterson. ``We expect supply chain pressures to ease as there is greater availability of ocean containers, freight carriers and raw materials,’’ he said, adding that a weaker Chinese yuan also helps.

Mohawk Industries Inc. shows how the improving supply chain and softer demand translate into lower inflation. The maker of carpets, ceramic tiles and countertops only partially offset raw materials costs with a second-quarter price increase on carpets. Mohawk tried and failed to push prices up further as housing demand slowed. Raw materials have since trended down and carpet prices will align with costs once higher-cost inventory is depleted, said Chief Operating Officer Christopher Wellborn.

The housing downturn will allow PulteGroup Inc. to catch up on construction and reduce the time it takes to build a home, which has doubled to six months from about 90 days in normal times. 

``I am very focused with our production teams to claw back cycle time in 2023,’’ said CEO Ryan Marshall. ``I’m confident based on the drop in volume, but also just the healing of the supply chain, which continues to get better and better, that can become a reality in 2023 and beyond.’’

Housing prices will have room to drop as the cost of steel, lumber and other materials declines and as homebuilders can boost efficiency by cutting construction times.

Not everyone is seeing light at the end of the tunnel though, especially where skilled labor is involved.Boeing would be able to produce more aircraft if General Electric Co. and its partner Safran SA could produce more jet engines, said CEO David Calhoun. Brunswick Corp., which makes recreation boat motors, was forced to slow production when almost 2,500 outboard engines were held up awaiting a single delayed part. The company is managing through ``some discrete but impactful shortages, most recently due primarily to continued labor shortages at some of our U.S. supplier facilities,’’ said CEO David Foulkes.  

Some of these labor issues will work themselves out, especially as the economy cools with rising interest rates. Labor force participation should rebound from 62.3% now to the pre-pandemic 20-year average of nearly 65%. People can’t hang out in their parents’ basement or friends’ couches doing nothing forever.

But the shortage of skilled workers was acute even before the pandemic. Washington’s knee-jerk solution would be to throw money at the problem. That’s not prudent during inflationary times. Besides, there’s plenty of funds sloshing around our school systems, it’s a matter of focusing those dollars on programs that teach students how to weld, plumb a house, operate CNC machines and 3D printers, and fix them. Local industry could donate the machinery and help orient the curriculum toward real-world job training.Demographics show that improving our home-grown workforce won’t be enough. The birth rate – or number of live births per 1,000 residents – at 11 in 2021 is less than half the levels of the 1960s. The need of the hour is for politicians on both sides of the aisle to step back from the ledge of their parties’ extremes and cut a deal on immigration that allows for an orderly, legal inflow of workers.

Supply chains will correct themselves by next year. The big question is whether the US embraces the opportunity to rebuild a supplier manufacturing base that was decimated over decades of free-trade evangelism. New factories will need to be highly automated and efficient. They’ll also need a trained workforce or else other countries will fill the breach.

More From Bloomberg Opinion:

• US Focus on Chips Could Prove to Be a Fatal Flaw: Tim Culpan

• Industrial CEOs Have a Window for M&A Bargains: Thomas Black

• Supply Chains Aren’t Bust, at Least Not in Asia: Anjani Trivedi

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

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