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Regional Matters

November 5, 2021

We’re All Out: Firms Struggle to Fully Meet Customer Demand

Demand for goods and services in the U.S. is strong, but supply disruptions and labor shortages are constraining firms’ ability to meet that demand. Results of the third quarter CFO Survey suggested that a wide majority of firms were experiencing supply chain disruptions, often resulting in lost or delayed sales. The Richmond Fed’s September surveys of business conditions and our recent conversations with businesses provided even more evidence that firms are unable to meet demand. What is more, both The CFO Survey and the Richmond Fed survey indicated that firms expect that difficulty to last well into, if not through, 2022.

I. Supply is Trailing Demand

Nearly 60 percent of respondents to our September business surveys reported that they are currently struggling to meet demand. This number differed slightly by sector, with 63 percent of firms in our manufacturing survey and 57 percent of firms in our service sector survey unable to meet 100 percent of customer demand. More specifically, in our service survey, 54 percent of non-retail firms struggled to meet demand, while 79 percent of the 29 retail respondents reported not meeting 100 percent of demand.

Most firms did not expect their production challenges to be resolved immediately. Although more firms, particularly in the manufacturing sector, expect to meet demand in the next six months, most expect the challenges to continue.

II. Why are firms struggling to meet demand?

Firms expressed multiple reasons for the challenges they face in meeting demand. Aggregated, firms were most concerned about labor shortages. Other reasons varied quite a bit by sector. Retailers most commonly cited shipping availability and delays as a problem.  Meanwhile, manufacturers and retailers were more likely to cite challenges procuring inputs than were non-retail services firms. Interestingly, only 13 percent of firms claimed that increased demand was causing the shortfall, suggesting that supply side disruptions are largely driving the current mismatch between supply and demand.

III. How long will this last?

Economic theory suggests that demand exceeding supply puts upward pressure on prices. In fact, our Fifth District business surveys have shown notably increased price growth in recent months; they continue to predict robust, albeit somewhat slower, price growth in the coming year. The question is: When will firms to produce enough goods or provide enough services to fully meet customer demand?

Many firms expect struggles to meet demand to persist beyond the next six months. Of firms that are not currently meeting demand, just over 30 percent expect to be able to fully meet demand by September 2022, only about 50 percent of firms expect to be able to meet demand by the end of 2022. Likewise, in the third quarter CFO survey, a majority of firms experiencing supply chain disruptions expected these disruptions to persist until the second half  of 2022 or later. 

It is worth noting that many respondents were unsure when they would be able to fully meet demand. In these times of uncertainty, it is especially important to understand the evolving challenges and opportunities facing Fifth District firms and how their environment impacts prices and employment.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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