Economic Outlook – Understanding Supply and Demand

AMD, Samsung, and FedEx’s outlook reports tell us everything we need to know about the current economic environment, i.e. It Sucks!!

AMD’s revenue is a billion dollars below its forecast, Samsung flags a drop of 32% in operating profit and FedEx says sales are slowing.

What does it mean?

Today almost anything to everything we use has chips inside it. If AMD, Samsung, or Intel are feeling the heat it is a clear signal, we are not buying these goods. It’s not just big tech items (servers or laptops) that are seeing slowing sales.

FedEx’s outlook confirms the above hypothesis. They are the world’s largest fleet and carrier alongside UPS. Reduction in carriers’ capacity proves we are not buying as much as we did during the pandemic which fueled this growth in the first place.

A hypothesis that is failing at this point is “supply chain issues caused inflation”. We have heard and read multiple times that the supply chain is a problem, ports in California were backed up for a couple of months. Which resulted in low output during a pandemic. However, this hypothesis, if supply chain pressure is reduced, inflation would ease. It hasn’t worked out that way. See the chart below, inflation and supply chain pressure are going in the opposite direction.

Source: American Shipper

Now there is of course an argument to be made that our demand is still higher than pre-pandemic levels and that is what is getting reflected in the inflation numbers. U.S. imports remain near all-time highs and have yet to materially fall. According to Descartes, U.S. imports in August were flat versus July and up 18% versus August 2019, pre-COVID. Customs data on FreightWaves SONAR shows that September imports were very close to September 2021 levels.

Long story short, we are still spending more than we were before the pandemic but it’s surely less than a year ago. It is reflected in the real estate prices, which have indeed gone down because of two reasons, high-interest rates, and low appetite to spend money (preservation mode is on). Here is the supply-demand circle that I have drawn for my audience (explaining how supply-demand causes inflation). It is a high-level diagram but provides the gist of the phenomenon.

There is a third dimension in addition to supply and demand which causes inflation/recession. Its availability of money. It’s not reflected above to avoid complexity. As demand increases, production cost increases, and companies take debt to fulfill demand. Interest rates were zero during the pandemic which made for cheap borrowing and companies did not hesitate to take more. As interest rates have risen, cheap money is no longer available. Debt is expensive. Projects that are good to have are no longer being funded which causes job cuts and adds pressure which contributes towards recession.

I believe the unpredictable times are over, we can predict the next moves from the forward-looking outlook provided by tech, chip, and supply chain companies. Black clouds are hovering. Can Feds which have advocated for a soft landing (by the way it’s no longer going to be soft, let’s just hope we land at this point) tame inflation by next year and avoid the dreadful inflation?


Nikhil Varshney

Nikhil Varshney is a product manager by profession and technologist by nature. Through this blog he wants to showcase disruption in the technology world. The idea is to break the concept into simple layman words to help everyone understand the basics