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Companies will have to deal with supply chain issues ‘for the foreseeable future’: Analyst

Eric Oak, S&P Global Market Intelligence Panjiva Research Analyst joins the Yahoo Finance Live panel with the latest on the Supply Chain crisis.

Video Transcript

ZACK GUZMAN: Also want to turn to, as we were discussing there, supply issues, still rearing their head when it comes to chip shortages. And it's kind of revealing itself here in the manufacturing report we got this morning. In fact, production at US factories fell by the most in seven months. There's a 0.7% decline for the month. That came after a revised 0.4% decline in the prior month in August. Keep in mind, the median estimate from Bloomberg's survey of economists called for a 0.1% monthly increase in factory production, so definitely not moving in the right direction.

For more on that, I want to bring on Eric Oak, S&P Global Market Intelligence Panjiva research analyst here with us now. And Eric, I mean, when we look at that report, maybe not surprising given how much we've been talking about this lately. But I mean, when you looked at it, how much of it is a signal that a lot of these issues are still here, persisting?

ERIC OAK: Thanks for having me. I think you're absolutely correct in that global or total US imports are at record highs. But that hasn't stopped supply chain struggles for individual companies or individual consumers from really making themselves apparent. With the additional capacity that we've seen coming into the country, it's causing congestion, it's causing potential supply chain disruptions that can kind of throw a wrench in the plans of businesses, especially manufacturers, who are hoping for every raw material that they need to be on the manufacturing floor at the same time.

AKIKO FUJITA: What does that tell you about the way in which things are sourced today? I mean, we're obviously talking about the problem at hand right now, but there's got to be some assessment that's happening about how things need to change so we don't find ourselves in this kind of bind again. Not-- it's not often that we have a pandemic. Obviously, that was a huge event that led to the kind of disruption we're seeing today. But what are you hearing about some of the reassessments that are happening on the back end to say, well, what do we need to do to avoid this?

ERIC OAK: So companies need to make a choice between whether they're going to operate very leanly in a just-in-time fashion or whether they're going to build up inventories as a safety measure against potential disruptions. So companies need to make that choice. And obviously, one side is additional costs versus kind of a risk reduction strategy.

What we've seen, looking at some of the data, is that sectors or industries like retailing and household goods have been actually increasing the amount of revenue for inventory that they are reporting. That was in Q2. Whereas industries like-- I believe it was semiconductors, automotives, materials were actually going the other direction. They were seeing for each dollar of revenue, they were seeing reduced inventories.

So that kind of gives you a slight measure of how different industries are reacting to that problem and which decisions they're making. Obviously, the great increase in demand for things like semiconductors and automobiles will push those numbers one direction. But again, that's one way to look at how companies or industries are reacting to that. That's that question.

ZACK GUZMAN: Yeah, the car issues here, as we talk about chip shortages, clearly a standout in this report. Motor vehicles and parts falling 7.2% last month. That was the sharpest drop that we've seen since April and almost, what, double-- more than double the 3.2% decrease in August. So I mean, that's still an issue there.

When we talk about maybe the impacts of all these things, right, we've already talked about pricing, but just straight up shortages don't seem that far out of the ordinary here if you think about how long this backlog continues. So I mean, you're an expert here in this. I mean, how long do you see these issues persisting before we can say, all right, we're out of the of the woods now?

ERIC OAK: Great. Yeah, the next chance for, kind of, a little bit of remediation or a little bit of slack to be put back into the system, all of the carriers are saying that the Lunar New Year holiday, which shuts down so many factories across Asia, might be a chance to catch up, kind of process some of these goes to the system. But generally, the capacity of the supply chain, the global supply chain as a whole, is relatively fixed in the short-term.

So without longer term investments moving forward, which will take, again, years to put into production or put into place, like additional terminals, additional cranes, possibly new waterways or other ports, supply chains, again, are going to be relatively fixed in capacity. And you might have to deal with or companies might have to deal with these congestion issues for the foreseeable future.

ZACK GUZMAN: All right, Eric Oak, S&P Global Market Intelligence Panjiva research analyst bringing us the latest there on that disappointing report. Appreciate the breakdown.