Fraser Johnson is the Leenders Supply Chain Management Association Chair at the Ivey Business School at Western University in London, Ont.

While economists have been parsing economic data almost daily in an attempt to forecast the probability of a “soft landing” for the Canadian economy, I propose an alternative perspective to evaluate our economic future.

I am a supply chain expert, not an economist, and view the current state of the economy through the lens of my discipline. The Bank of Canada has pointed to supply chain disruptions as a major contributing factor for inflation in Canada and around the world. If this represents a root cause of Canada’s inflationary problems, paying attention to what is happening with our supply chains is uniquely relevant for predicting economic performance. The evidence suggests a soft landing is within reach.

I define a soft landing as the Bank of Canada successfully reducing inflation through a slowdown of the economy without a recession and accompanying high unemployment. Soft landings are rare and difficult to achieve, but the Ivey Purchasing Managers Index offers robust insights.

The Ivey PMI is an economic index that measures the month-to-month variation in economic activity as indicated by a panel of purchasing managers from across Canada in five areas: purchases, employment, inventories, supplier deliveries and prices. Panel members have been carefully selected geographically and by industry sector to match the Canadian economy as a whole. Evaluating the likelihood of a soft landing requires assessing the trends in each of these five areas and considering their relationships and interdependencies.

The pandemic disrupted traditional supply and demand patterns in global supply chains, triggering product shortages for everything from semiconductors to lumber, ultimately stoking price increases. Just as many Canadians likely bought more toilet paper as they saw the grocery store shelves get cleaned out, businesses reacted the same way by building capacity and buying more inventory to avoid future disruptions. The result was many companies overcorrected and were stuck with surplus inventory earlier this year.

The supply and demand distortions that ripple through the supply chain is referred to as the bullwhip effect. This phenomenon leads to higher supply chain costs, which get passed on to buyers and ultimately to consumers.

Examination of the Ivey PMI provides insights about the direction of the economy (an index score above 50 indicates a positive direction while an index score below 50 indicates a negative direction). After a sustained period of expansion between January, 2021, and July, 2022, with an average score of 61.7, purchases have recently decelerated with a three-month moving average of 50.8 at August, 2023. These data indicate that the Canadian economic engine is idling – it is not accelerating quickly, nor is it moving in reverse.

However, focusing on purchases in isolation ignores the broader picture. First, lead times have returned to prepandemic levels, stabilizing at a three-month moving average of 52.7, compared with an average of 34.7 in 2021. This is important because variability in lead times is a major contributor to the bullwhip effect. Second, inventories, which expanded rapidly in 2021 at a clip of 59.4, have also returned to normal levels, at an average of 51.3 for the most recent three months.

Third, while purchases, supplier lead times and inventories have stabilized, employment remains strong, with a three-month moving average of 55.5 versus 60.4 two years prior. Members of the Ivey PMI survey panel indicate that while employee turnover has declined, employee retention and filling vacancies remain a priority.

Collectively, these four areas indicate that the health of our supply chains is returning to normal. Stable supply chains mean stable cost structures and employment levels, thereby eliminating some of the turbulence that might prevent a soft landing.

Despite these optimistic signs, there remains one area of uncertainty that could steer the economy to a hard landing. While the Bank of Canada can influence the economy through interest rates, there are factors outside its control that can affect its ability to navigate a soft landing. Among these are rising commodity prices, including oil. Higher oil prices ripple through the supply chain by increasing transportation and other input costs.. Higher gas prices hurt economic growth by sapping consumer spending while simultaneously feeding inflation. Consumers will also see the effects at the grocery stores through further increases in food prices.

With stable supply chains and robust employment, the elusive soft landing appears to be within reach. However, nothing in life is certain. How the central bank reacts to volatile commodity prices deserves watching and may ultimately determine whether the landing will be soft or hard.

This article first appeared as an opinion piece published in the The Globe and Mail. Read the original article.

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