Macroeconomic Outlook: Uncharted Territory

The collective fiscal and monetary response to the pandemic has supercharged global demand in many sectors, exposing a cascade of supply constraints and price inflation across materials, logistics and labor. S&P 1200 global companies have mentioned inflation and supply chain issues in their earnings calls more than 17,000 times in just the past two quarters alone.

Supply chain leaders say their boards and executive committees have supply chain disruption fatigue and want to know when the pain will end. COOs and CSCOs find themselves in uncharted territory where traditional indicators are no longer a reliable guide, and they are urgently seeking ways to better predict where markets go next.

A few weeks ago, Gartner held an event for our COO and CSCO communities that included a talk by macroeconomist, Professor Nick Bloom of Stanford University. If the supply chain situation was extreme on the day of the event (Feb. 22), we all know where it has gone since. Oil prices, along with many other commodities, are up more than 40%, significant air space and logistics capacity have shut down, and many Western businesses are embargoing or completely divesting from Russian markets. And for good reason — the Russian invasion of Ukraine is first and foremost a human catastrophe in its making and suffering. Gartner has publicly condemned the invasion and gathered resources that all members of the executive committee can use to navigate through this turbulent situation.

Beyond the near and medium-term impacts of the invasion, many questions remain for where the economy and supply chains go from here. As a gauge, we polled COOs and CSCOs at our macroeconomist event on their expectations for when the next recession will occur in the U.S. and Eurozone.

The most common prediction was next year, with the U.S. recession expected to come first, as the Federal Reserve raises rates and reduces money supply through quantitative tightening. The destruction of demand associated with an economic recession might just be what breaks the current inflationary cycle.

Other Community Learnings

Here are some key takeaways from Professor Bloom’s presentation and the discussions that followed:

• While terms like “The Great Resignation” have become commonplace, the level of “quit rates” seen in Western labor markets is commensurate with recent wage increases, which act as a feedback loop driving more people to separate from their current jobs.
• In addition to traditional measures of inflation (e.g., CPI and PPI) being at 40-year highs, there are more subtle forms of inflation hiding in reduced product sizes, lower customer service levels, and even lower product and service quality levels offered by companies. Professor Bloom estimates that without these less visible changes, true inflation would be 1.3% higher than stated rates.
• The U.S. Federal Funds Rate could rise significantly (e.g., by 3-5%) as part of the next tightening cycle based on its past relationship with other variables such as inflation, unemployment and GDP growth rates.
• Specific to the labor market, Professor Bloom expects companies to continue offering hybrid office and remote working arrangements for different parts of each week.
• Hybrid working will and already is impacting the layout and design of office spaces. However, the need for space to support a significant portion of the workforce for a few days each week means that most companies are not planning to cut their overall office space footprint.
• In response to continued uncertainty in the marketplace, Professor Bloom’s advice is to pay for flexibility using leased assets for burst capacity and shorter contract commitment terms. Member reaction was that this approach works for peripheral investments, but core ones in support of strategic business directions will still require larger, bold bets.

We look forward to the next gathering of our global COOs and CSCOs on April 26, for a virtual Leaders in Action event on “Defining the Secure Supply Chain,” co-hosted by Mark Bakker and team at HP Enterprise. In the meantime, we hope you all stay healthy and safe.

Stan Aronow
VP Distinguished Advisor
Gartner Supply Chain
Stan.Aronow@gartner.com

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