Biden Administration Efforts on Supply Chain Resiliency
RedStone Resource
December 1, 2023
Inside This Edition
Presidential Election Years and Business Activity
It is a popular belief that Presidential election years are bad for economic activity (and therefore freight activity). There have certainly been some specific years in which there was a significant impact on the market, but only 17% of the time since 1928 has the economy and market struggled during an election year.
US Manufacturing Activity Likely Remained Flat in November
There is a direct correlation between US manufacturing activity and freight volumes. There is an 85% correlation between industrial production in manufacturing in the US and daily freight volumes. The latest data from S&P Global shows the Flash Purchasing Manager’s Index (PMI) came in at 49.4 in November, down slightly from 50.0 posted in October.
Transportation Employment Cost Index 3.8% Higher Year-over-Year
The latest data from the end of Q3 was released and it shows that labor costs were rising at a 3.8% rate vs. a year ago. Between the second and third quarter of the year, the index grew by 0.7%, an anemic rate of growth.
ECONOMIC BRIEFING
Biden Administration Efforts on Supply Chain Resiliency
The Biden Administration announced a wave of 30 steps that it proposes to prevent a repeat of the past two years of supply chain congestion. Some of these actions can be accomplished with executive orders as part of the Council on Supply Chain Resilience, others may require Congressional action. Among the steps outlined in the report (link below to full White House statement), actions would include establishment of the Council, using the Defense Production Act to make essential medicines domestically produced, establishing a cross-governmental data sharing effort to get early visibility to supply chain bottlenecks, proposing $275 million for advanced energy manufacturing, $196 million to improve the domestic food supply chain, adding to more than $714 million already invested to move defense supply chain systems back into domestically controlled production, launching a DOT Multimodal Freight Office, and others.
Private enterprise has already begun to invest in securing domestic supply chains in 2023 by investing in manufacturing capacity in the US at a rate of $200 billion annually (a 62% increase over 2022 levels and well ahead of the decade average of $50 billion annually in the period prior to the pandemic). A surge in manufacturing in India, Mexico, and southeast Asia are also showing that global supply chain diversification is still underway. This will also have some impacts on global freight distribution, something that will need to be monitored in the coming quarters.
Presidential Election Years and Business Activity
It is a popular belief that Presidential election years are bad for economic activity (and therefore freight activity). There have certainly been some specific years in which there was a significant impact on the market, but only 17% of the time since 1928 has the economy and market struggled during an election year.
Bank of America Global Research released an analysis of S&P 500 returns in Presidential election years since 1928 and found that only in four of those years was there a drop in the index. Since the S&P 500 is largely driven by corporate activity and profits, a rising index is typically indicative of a growing economy and one that is generating supply chain activity. The only years that experienced a drop were in 1932, 1940, 2000, and 2008. That does not mean that the economy cannot take a dive in 2024, but the odds are against a downturn based on the impacts of a presidential election alone. Other factors would be weighing-in to push it into negative territory.
TRANSPORTATION BRIEFING
US Manufacturing Activity Likely Remained Flat in November
There is a direct correlation between US manufacturing activity and freight volumes. There is an 85% correlation between industrial production in manufacturing in the US and daily freight volumes. The latest data from S&P Global shows the Flash Purchasing Manager’s Index (PMI) came in at 49.4 in November, down slightly from 50.0 posted in October. A reading below 50 suggests that the sector is contracting, although this reading shows only a marginal deceleration in manufacturing activity.
Perhaps the most worrisome part of the Flash report (a preliminary look at the monthly data with roughly 80-85% of the monthly surveys reporting) showed that reductions in employment started for the first time since the pandemic, and expectations for the year ahead dropped to their lowest levels since July.
Companies are keeping business inventories lean and are using a reduction in inventory to help reduce capital expenditure costs and free up cash. This is good news in the sense that it will restart global supply chain activity in the spring when companies begin to place new orders that cannot be filled with existing inventory. This restarts the global supply chain from procuring raw materials to use of energy, hiring factory workers, etc. But for now, freight activity will remain sluggish as the PMI suggests.
Transportation Employment Cost Index 3.8% Higher Year-over-Year
The Bureau of Labor Statistics’ Employment Cost Index is a good barometer for labor costs in various industries across the economy. The latest data from the end of Q3 was released and it shows that labor costs were rising at a 3.8% rate vs. a year ago. Between the second and third quarter of the year, the index grew by 0.7%, an anemic rate of growth.
A year ago, in Q3, employment costs were rising at 5.4% annual rate and were just off their peak of nearly a 6% industry level rate of increases. In the decade prior to the pandemic, the Employment Cost Index averaged roughly a 2.6% rate of growth annually and over the longer-term range it has averaged 3%. Current rates are still exceeding that long-term average, despite a significant freight sector slowdown currently being experienced on a global basis.
