A recent Wells Fargo Webinar focused on supply chain disruptions in the ongoing COVID-pandemic environment, the challenges they pose to businesses, and the macroeconomic impacts and outlook. Hosted by Perry Moreth, Senior Vice President, Global Advisor Specialized Industries at Wells Fargo, guest speakers included Gene Seroka, Executive Director of the Port of Los Angeles, and Sarah House, Senior Economist, Wells Fargo Securities, LLC.
Pandemic-induced disruption and demand surge
The COVID-19 pandemic initially shuttered economies, and cargo trade plummeted. A cargo surge followed as American consumers stayed home and shifted discretionary spending from services to goods. Amid ongoing local and global supply chain disruptions, workforce shortages, and altered consumer behaviors, this import surge continues today.
The Port of Los Angeles and neighboring Port of Long Beach make up the San Pedro Bay Port Complex — which handles roughly 40% of U.S. import volume. The Port of Los Angeles is the busiest container port in The Western Hemisphere, and its cargo reaches every Congressional district in the U.S. The San Pedro Bay ports support one in nine jobs in the five-county region of Southern California, and approximately one million people statewide have Port supply chain-related work. Volume and other performance indicators at the Port of L.A. reveal much about continued global supply chain challenges.
A traffic jam
The Port of L.A. moved nearly 11 million 20-foot container units during the 12-month period ending on June 30, 2021. In May 2021, it became the first port in the Western Hemisphere to cross one million container units in a single 30-day period. According to Seroka, the Port of L.A. has been handling peak container volume for more than one year – averaging 900,000+ container units a month. Today, the Port of L.A. is working 50% more vessels daily than before the pandemic. Despite Asia factories clocking all-time output highs, and 99 ½% of all ships deployed worldwide, there are still backlogs on order and more containers are being shipped than there is space available at inland warehouses and distribution centers.
With terminal tarmacs full, ships are waiting at anchorage about 12 days on average, an issue playing out at other major ports in the U.S. and overseas.
Dwell times, the waiting period for containers to clear out of port terminals by trucks, are at an all-time high. Warehouse space availability in Southern California is also near its all-time low. Because of over-stocked warehouses, over-capacity container terminals and spot shortages of truckers and warehouse workers, the container dwell time at port terminals is roughly six days compared to the typical two- to three-day average. Dwell time for on-dock rail was up to 13 days earlier in the year but has improved to average between four and five days.
Containers are arriving full but leaving empty. For every full export container, five empty containers return to Asia where they are rapidly filled with the next round of imports. The import to export ratio at the port is highest trade gap in memory.
Improving supply chain visibility at the Port
Despite physical bottlenecks, the Port of L.A. is expanding digitization of key supply chain data to improve cargo and operational visibility. “The specificity of looking upstream to predict volumes will be all important in how we can bring certainty back to our supply chains and our customers for product delivery,” says Seroka. For example, The Port Optimizer, co-created in 2016 by the Port of L.A. and Wabtec (formally General Electric Transportation), is a port community system for cargo owners to track their shipments weeks in advance of arrival in L.A. Ocean carrier schedules and data feeds from U.S. Customs and its automated manifest system underpin the Port Optimizer. Four new modules have been implemented during the pandemic:
1) The Signal, co-created with U.S. Customs and Border Protection, gives a three-week upstream outlook on incoming cargo.
2) The Return Signal, co-created with the trucking industry, helps truckers identify the terminals accepting empty containers, with aggregated information updated every five minutes.
3) The Control Tower gives an aerial view of Port of L.A. activities in real-time, helping shippers see bottlenecks before they become problematic and to enabling cargo owners to make the best decisions on where to route their products.
4) Similar to The Signal, the Horizon is a new, six-month forecasting tool to enable better understanding of future cargo flows and prepare cargo owners, Longshore labor and other supply chain service providers to best position their personnel and equipment in anticipation of inbound cargo volumes.
“We are relentless in our efforts to add transparency and value to the supply chain, knowing that all participants are operating at full speed” says Seroka. “We have an outsized obligation to help everywhere we can.”
More broadly effecting short- and long-term changes
President Biden’s executive order on supply chain, Seroka said, is shining a spotlight on supply chain issues. Department of Transportation Secretary Pete Buttigieg held a roundtable on July 15, 2021, with stakeholders from across the supply chain. The industry is in dialog with the most senior administration officials and working across the private sector at the C-Suite level to address short-term challenges and longer-term systemic issues. In October, these discussions led to the creation of an Accelerate Cargo L.A. program with a handful of major retailers, shipping logistics providers, railroads and trucking companies moving their cargo on a 24/7 basis.
Macroeconomic impacts and outlook
Like many of the current supply chain issues, the remarkably fast recovery has its roots in consumer demand. Despite a return to pre-COVID economic activity, sharp drawdowns in inventory are still taking place. In fact, supply chain uncertainty is causing many cargo owners to pull their import shipments ahead of schedule as much as possible to avoid low product inventories during the upcoming holiday season. Manufacturing, wholesale, and retail inventories are at their lowest level versus sales in about a decade. “Compared to the Great Recession, which took about three years to return to pre-recession levels of activity, the economy has already returned to its pre-pandemic size” said House.
The outlook for U.S. real GDP growth in 2021 is close to six percent, well above the traditional rate of around two percent. However, the pace of growth would be even stronger, about two percentage points higher, during the first half of the year had there been more available inventories.
Household income levels
While income typically plummets during a recession, and a drop in spending follows, a forceful U.S. policy response to the pandemic-induced recession has impacted household income. All of the stimulus packages to come out of Washington, D.C. over the past 18 months equate to approximately 24% of GDP, noted House. These initiatives have kept income above its pre-COVID levels. “Even as fiscal support wanes, consumers remain in a solid position to spend. This is not a balance sheet recession,” notes House. The strong financial position of U.S. households, with total extra savings equating to around $2.3 trillion, is one reason for an above-trend growth forecast.
The economic recovery has been uneven and, in some ways, atypical. Services spending remains below pre-COVID levels, noted House, while durable spending—usually deferred during a recession, had rebounded one month after the pandemic began.
COVID concerns represent a near-term risk to the growth outlook. But with each wave of COVID, risk tolerance has increased so that there has been less impact on demand. There has been less consumer reaction to the latest delta wave. House noted that the risk tolerance globally is different than in U.S., however, as evidenced, for example, by renewed restrictions across much of China in response to climbing COVID cases there mid-summer.
Persistent labor shortages
U.S. unemployment is at 4.8%, but this understates a tight labor market. There are about three million fewer people in the labor force. The availability of workers continues to hold back jobs recovery and constrain economic growth. As of August 2021, about 50% of businesses said they cannot find workers even though the economy has approximately five million fewer jobs. Wages are rising well above the typical run-rate for the past cycle, particularly in lower-wage sections such as leisure and hospitality, where businesses are having difficulty filling jobs, as well as the transportation sector.
The end of extended unemployment benefits could take pressure off of wage growth. As COVID concerns fade, more people could return to the job market, with potentially more material cooling in wage growth by the Spring of 2022. At that point, the supply of workers and demand for workers could come into better balance.
Core inflation (measured by CPI index) has risen more than 4 percent as of July 2021 the highest rise since the 1990s. Firms have had some pricing power to pass higher input costs on to customers amid continued demand. More firms are raising prices now than any time since 1980. Inflation is likely to push higher over next few quarters while beginning to slow in 2022, with adjustments to supply issues and cooling demand.
Continuing global supply chain dynamics in the short term
The need to rebuild inventories will keep production and trade strong even as spending cools over the next year. Record levels of cargo volume are moving through the system but still too slowly. Inventory levels remain near all-time lows. The price for getting supplies to their destinations continues to rise. The supply-demand curve could remain unchanged for some time. As a result, meaningful easing is not yet in sight for the global supply chain.
To listen to the full Webinar replay click here.
Source: Webinar replay featuring Port of L.A. Gene Seroka, Executive Director of the Port of Los Angeles, and Sarah House, Senior Economist, Wells Fargo Securities, LLC