West Coast Labor Negotiations Reach Tentative Agreement
RedStone Resource
May 15, 2023
Inside This Edition
Global Purchasing Activity Still Strong, But Being Driven by Services Demand
The global PMI released by S&P Global showed it at 54.2 in April which was a bit higher than 53.4 in March. But still, this is incredibly strong. The problem is that it is being driven at this time by the global services sector, which in itself does not drive a lot of supply chain activity.
West Coast Labor Negotiations Reach Tentative Agreement
A tentative agreement between the International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association (PMA) has reportedly been reached. Although a final agreement could still be several months away, and ratification by ILWU workers is not guaranteed, this was welcome news for shippers.
Many Modes Back to “Normal”; Assuming Pre-Pandemic is Normal
There have been many debates about the latest downturn in freight movement and whether this is a sign of recession in the sector or a “reverting to the mean” – or returning to normal. If the decade prior to the pandemic was a normal growth rate and the last two years were an anomaly created by a 100-year event, then this would corroborate with most of the data that we see for transportation modes.
ECONOMIC BRIEFING
Mixed Messages on Inventory Strategies Headed into the Peak Supply Chain Season
Current inventory to sales ratios shows that approximately 63% of the nation is sitting 3% or more above their ten-year average prior to the pandemic. There is some raging debate over the level of inventory that companies are willing to keep, based on the past two years of supply chain bottlenecks and congestion offset by the risk of rising interest rates and increasing cost of capital. Some manufacturers, for instance, are reporting that they will allow inventories to remain 15% higher than prior periods because of supply chain disruption risk.
There are several large pockets of the US economy that are still facing continuous supply chain challenges. Some non-residential construction sectors are still facing significant delays for electrical equipment and electronics. Aerospace and automotive supply chains are also still scrambling to recover, and the full replenishment of depleted auto inventories could easily provide a runway of 24 months or more for getting those supply chains back into full cycle.
Since the inventory carrying strategy for this fall will be varied, it is difficult to know what the peak shipping season will look like. Global manufacturing data would suggest that there is no current surge in new order demand. Many purchasing managers may still be evaluating their situation and the economic outlook to determine how heavy to build inventories going into the peak.
Global Purchasing Activity Still Strong, But Being Driven by Services Demand
The latest wave of survey reports from around the world might suggest that global supply chain activity is going to remain stable, at least building into the peak. The global PMI released by S&P Global showed it at 54.2 in April which was a bit higher than 53.4 in March. But still, this is incredibly strong. The problem is that it is being driven at this time by the global services sector, which in itself does not drive a lot of supply chain activity. This is also why many transportation metrics are softer going into the peak season.
The services index hit 55.4 in April while the manufacturing sector was 49.6, and just slightly in contraction. Many questions have emerged about the re-emergence of the Chinese economy in the wake of ending the zero-Covid policy. Chinese consumers have shown a desire to travel and spend on entertainment and tourism, but product spending is still lagging. Manufacturers in China were still softening payrolls through April amid weaker new order demand from both domestic and global markets. Europe was also still struggling with much of its new order demand remaining weak for the 4th or 5th month in a row (depending on the country).
TRANSPORTATION BRIEFING
West Coast Labor Negotiations Reach Tentative Agreement
Although details at the time of writing were scant, a tentative agreement between the International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association (PMA) has reportedly been reached. Although a final agreement could still be several months away, and ratification by ILWU workers is not guaranteed, this was welcome news for shippers. A tentative agreement likely means that some of the slowdowns in throughput are likely to end and more supply chain continuity can be expected with the peak season around the corner.
Questions remain as to how shippers will handle inbound freight this fall. With a global economic slowdown and softening economic conditions in the US, volumes are projected to be weaker at many ports this fall compared to the past two years. Some volume estimates suggest that port volumes could still be more commensurate with levels prior to the pandemic, and any mention of the word “slowdown” is relative. The NRF still expects an average of 2.0 million TEU imports hitting US shores over the July to September period. That would be just shy of the 2.16 million TEU rate hit in the same three months last year. On a percent basis, Hackett and Associates, and the NRF expect Q3 imports to be 7.2% vs last year with the first 9 months of the year down nearly 18%. A weak first half is expected to yield to a slightly better second half at this stage.
Many Modes Back to “Normal”; Assuming Pre-Pandemic is Normal
There have been many debates about the latest downturn in freight movement and whether this is a sign of recession in the sector or a “reverting to the mean” – or returning to normal. If the decade prior to the pandemic was a normal growth rate and the last two years were an anomaly created by a 100-year event, then this would corroborate with most of the data that we see for transportation modes. For instance, the Shanghai Containerized Freight index has fallen sharply from its 2021 peak, but current rates are just slightly ahead of levels seen in 2019 just before the lockdown.
Many other indexes are also trending in-line with 2019 levels. Inbound prices for international air cargo (according to the BLS monthly survey) are also slightly ahead of 2019 levels, despite coming significantly off late 2021 peaks. Even the Cass Freight Expenditures Index was still running more than 20% ahead of 2019 levels. Producer Price Indexes covering LTL, TL, and Rail are all still elevated above their 2019 levels and remain above their long-term 20-year growth rates. But again, they are well off their peaks which is where most of us have focused our attention of late.
In the simplest of terms, it seems that many companies should be able to dust off their playbooks from the 2-3 years prior to the pandemic and that appears to be the operating environment setting up for the second half of the year.
