Windsor Brief for December 2021
Investing:What is wrong with the global supply chain?
Planning:2021 Year End Checklist
Market Snapshot
This month’s Windsor Brief looks at the global supply chain and the issues it is facing. Inflation is being experienced in nearly every aspect of life, and the supply chain is playing a large part in its rise. Below, we look at the different pieces of the supply chain, what the issues are and when we expect to see relief.
Our Financial Planning section will focus on year end planning and your financial checklist.
If you’d like to talk to us further about these topics or about any of your financial planning or investment goals, please do not hesitate to get in touch.
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Investing: What is wrong with the global supply chain?
As we enter the final month of 2021, inflation remains the top concern for consumers and investors. Although there is debate on the duration of this inflation, one thing that is clear is that the global supply chain has experienced severe stress, causing disruptions and price increases. Prior to the global economic shutdown caused by Covid-19, the supply chain was a finely oiled machine running on a just in time protocol, seamlessly moving product from suppliers to manufactures to distributors to the end consumer. When everything was humming along, this was a global dance that looked flawless, and nobody gave it two thoughts. Fast forward to today, and the global supply chain is in disarray, causing disruption throughout the chain, manifesting itself in shortages and inflationary pressures worldwide.
But what happened? There were several items that came together in a perfect storm creating the issues we are experiencing today. First, the global economic shutdown resulted in factories being shuttered and the overall distribution network (ships, trucks, air, warehouses, ports) grinding to a halt. Unfortunately, it is not as simple as flipping a switch back on and everything is up and running again. From worker shortages, to shipping delays to shortages of semiconductors, the supply chain was turned upside down globally and will take time to bring it back up to speed.
As the economies reopened worldwide, pent up demand for products and goods skyrocketed. Consumers were flush with cash from a lack of spending during the lockdown as well as from Government stimulus, and this has resulted in continued strong consumer demand.
US Personal Spending
Source: YCharts
Unfortunately, while demand can turn up quickly, supply takes much longer to adjust, especially after an economic shutdown. This has led to major disruptions for manufacturers who cannot produce or supply as much product as they did pre-pandemic, much less for the increased demand. Labor shortages, component shortages and logistics issues all have combined to impact supply. Looking at labor, despite the abundant job openings, workers have been slow to fill all the open positions. In addition, it appears that many labor participants have dropped out of the workforce, exasperating the labor shortage issue. On the positive side, unemployment is below 5%, indicating a strong economy.
Source: YCharts
The inability of manufacturers to fully staff their factories along with the shortage of components to complete their assemblies has resulted in manufacturing lead times expanding dramatically.
Richmond Fed Manufacturing Vendor Lead Time Index
Source: YCharts
Making a bad problem worse, product that does get produced is being impacted by the logistics side of the supply chain. Like the manufacturing issue, the shipping industry was not prepared for the post-pandemic demand. Labor shortages, ships and containers located in the wrong geographies, truck driver shortages, and overall alignment issues between countries and the logistics chain has resulted in delayed shipping and rapidly increasing prices. For instance, the cost for an 8500 twenty-foot equivalent vessel (a ship that can hold 8,500 standard size shipping containers) has increased nearly fivefold.
Container Shipping Rate for 8500 TEU Vessel
Source: YCharts
Unfortunately, this is not where the logistics breakdown ends. Ports in North America and Europe eventually became overwhelmed by the number of arriving ships. These ports did not have the labor to unload the arriving ships quickly enough, and a massive backlog quickly developed. There is a shortage of workers to unload the ships and a shortage of truckers to haul the unloaded product away from the ports. Layer on top regulatory hurdles which further is impacting productivity. Thus, instead of a transit point, ports have turned into major choke points, delaying product from reaching its end destination.
The irony of these delays is that the product that now gets stuck on anchored ships outside the ports, or even in inventory sitting in shipping containers in the ports, is often needed to manufacture other finished product, thus causing further delays, and recreating the cycle. Shortages beget more shortages.
For example, the automobile industry has been shuttered due to the lack of semiconductor chips needed to complete the manufacturing of today’s high-tech cars. Another example is a computer manufactured in China requires components from other countries – computer chips from Malaysia, flat-panel displays from South Korea and dozens of other components from around the world. One hiccup in a single component causes a complete manufacturing breakdown. And each component has its own set of parts that go into its manufacturing. So, any breakdown has far reaching consequences down the supply chain.
When will the supply chain problems end? Nobody knows for sure, but expectations are it will last well into 2022. The good news is there are already signs that bottlenecks are improving. It will be a gradual recovery, but the supply chain will repair itself. One major risk to this recovery will continue to be Covid-19. Any new restrictions or shutdowns imposed by governments worldwide could further pressure supply chains. Hopefully, if all goes well, we should once again see a finely oiled machine manufacturing and delivering finished goods to the end consumer in the not-too-distant future. As the supply chain improves, expectations are this should also help alleviate inflationary pressures by mid- to late 2022.
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Planning: Year-end Financial Checklist
December already! Time to make that list and check it twice. This list has nothing to do with shopping – it is all about your year-end financial checklist. The following are some of the more popular items that may be included on your financial checklist:
Retirement Accounts
- Contributions: Salary deferral contributions into 401k or 403b accounts need to be made by December 31st. The 2021 employee deferral limit is $19,500 ($20,500 for 2022). Individuals age 50 and older can make an additional $6,500 catch up contribution (unchanged for 2022). 2021 IRA contributions of $6,000 plus $1,000 catch up can be made up until April 15th next year. IRA contribution limit does not change for 2022.
- Conversions: A conversion from IRA to Roth IRA is taxable in the year you convert. If 2021 is a low-income tax year, then you will want to have the conversion completed by December 31st.
- Distributions: Required Minimum Distributions were eliminated for 2020 but back in full force for 2021. If you are subject to RMDs, the minimum amount must be distributed from your account by December 31st (unless you turned 72 this year and can delay your first RMD until April 1, 2022). New RMD rules are in place for individuals that inherited an IRA in 2020 and beyond. Please let us know if you have any questions regarding RMDs in your account.
Health Savings Accounts
- Contributions: Review your year-to-date funding and see if you are able to adjust your last paycheck contribution if needed or applicable. The 2021 contribution limit, which includes employee and employer contributions, is $3,600 for individuals ($3,650 for 2022) or $7,200 for family coverage ($7,300 for 2022). Age 55 and over can make an additional $1,000 contribution (does not adjust for inflation). Direct non-payroll contributions can be made up until April 15th.
529 Accounts
- Contributions: Must be received by the plan by year end in order to claim any available state income tax credit. In Indiana, the maximum annual credit per tax return is received once you have contributed $5,000 into Indiana 529 plans (equals a $1,000 Indiana income tax credit).
- Distributions: Must be taken in the same calendar year that the qualified educational expense is paid. If you paid an education expense in 2021, you must take the 529 Plan reimbursement distribution by December 31, 2021. If you are going to pay the expense in January 2022, then you need to wait and request the distribution in 2022.
Charitable contributions
- If under age 70 ½, consider transferring shares of low basis investments. The date the charity receives the contribution is the year in which you can claim the deduction for the full market value. Consider the benefits of bunching contributions in one year if it will allow you to itemize your deductions in one year and then take the standard deduction in other years.
- If you are over age 70 ½, then you can make a Qualified Charitable Distribution from your IRA of up to $100,000 per year.
- Extended for 2021 only, if you claim the standard deduction, you can also take a charitable contribution deduction for cash contributions to public charities. This above the line charitable deduction will reduce your taxable income by up to $300 for single filers or $600 for joint filers. You will need to keep your written receipt as back up for this deduction.
Family Gifting
- The annual gift tax exclusion amount is $15,000 for 2021 (increasing to $16,000 for 2022). This is the amount you can give each recipient without paying gift tax or using part of your lifetime exclusion amount.
Windsor would love to help you check off a few items on your financial to do list. Please let your Windsor advisor know if you have any questions regarding any of the above checklist items.
