Economic Briefing
Economic Outlook and Impact on Global Supply Chain
The latest data coming out of the Atlanta Federal Reserve shows some economic deceleration taking place in Q2. The GDPNow forecast expects Q2 GDP to be just 1.5%, down from growth estimates of 3% earlier in the quarter. Deceleration in consumer spending and a slight reduction in corporate investment is impacting the outlook.
The greatest question is the health of the consumer and what that means for everything from manufacturing to retail and the supply chain linking everything in between. One thing is certain: it is risky to underestimate the resilience of the US consumer. Despite rising credit card debt, consumers are finding the resources to take on record levels of travel this summer. But the question is whether they will move more heavily into product spending by this peak season. Most forecasts still predict a strong peak season and consumer spending on holiday goods will resemble something more akin to 2022 levels of spending (which was a pretty good year).
This is a confusing time for purchasing managers. On one hand, most of them would like to come out of the peak season lean (because of higher risks of obsolescence and higher cost of capital for carrying-over inventory). And with maritime prices remaining higher, the overall cost of transportation is higher.
On the other hand, a strong US dollar and foreign manufacturers being willing to discount prices is providing buyers with a good global shopping environment. And higher shipping costs sometimes lead buyers to create larger size shipments to pack as much into containers as possible, spreading costs across more products. These factors could override pressures to keep inventories lean and increase volumes regardless of what consumer spending shows in the months leading up to the peak retail season.
The National Retail Federation is still predicting that retailers will move more than 2 million containers a month into the US between now and September, which is historically a strong volume. If that plays out as expected, it will feel like a good holiday peak and stronger than last years’ experience.
Maritime Prices Surge on Red Sea Disruption
The Red Sea situation is intensifying and now concerns are rising that attacks by Somali Pirates in the Indian Ocean could add more risk to transits in the region. The impact is being felt across the entire maritime sector. Drewry showed that trade lanes linking Asia to Europe are surging. Prices from Shanghai to Rotterdam are up 458% over last year in the spot market to $7,322 per 40ft container. Similar prices from Shanghai to Genoa are up 249% Y/Y. Asia to US trade lanes is also surging with Shanghai to LA rising by 322% to $6,673 per 40ft container and Shanghai to New York is up 212%.
Estimates suggest that the disruption in the Red Sea has kept “freight on water” long enough that it might have stripped as much as 15-20% of global capacity out of the market. Attacks continue in the Red Sea as Houthis Rebels target Israel or Western flagged ships attempting to transit the region. The latest data shows that transits through the area are down 90% and each transit around the Cape of Good Hope adds $1 million in additional fuel costs for each voyage. In June alone, Houthi rebels fired 14 anti-ship ballistic missiles, 38 air drones, 19 surface drones and more. They sunk one ship and damaged several others. In addition, Somali Pirates have changed their tactics in the Indian Ocean and are taking advantage of global naval forces that are distracted with the Red Sea region. Attacks are taking place much deeper in the Indian Ocean and attackers are larger in number, most attacks now have more than 20-30 pirates attempting to board ships.
Hurricane Season Heats Up, Any Risks for Supply Chain Disruption?
This year’s hurricane season was expected to be an extraordinary one, and it has been in several ways. First, it was a late start to the season with no named storms prior to June (which is rare despite hurricane season officially starting in June). But secondly, it has come in with a roar in June as Hurricane Beryl breaks records for the earliest Category 5 hurricane to make landfall in the Caribbean. At the time of writing, the storm was still spinning in the Caribbean and storm tracks were uncertain where it would impact the CONUS (Continental US). Some forecasts had it impacting Southern Texas, making it the second storm this season to hit the area.
From a supply chain perspective, the storms have not significantly impacted freight flows, especially maritime transits. Forecasters are watching a large Saharan dust storm that may help reduce the risk of long-track hurricanes, but that won’t prevent storm formation in the Gulf or off the East Coast. Forecasters are still calling for 7-10 strong hurricanes with up to 13 landfalls this year. A combination of warm Atlantic waters (which provides the fuel to create strong storms) and the ending of El Nino and starting of a La Nina cycle (which reduces upper-level wind shear) is the formula that forecasters believe will create a unique storm season stretching from now through December.
Inside This Edition
Maritime Prices Surge on Red Sea Disruption
The Red Sea situation is intensifying and now concerns are rising that attacks by Somali Pirates in the Indian Ocean could add more risk to transits in the region.
Hurricane Season Heats Up, Any Risks for Supply Chain Disruption?
This year’s hurricane season was expected to be an extraordinary one, and it has been in several ways.
Outlook for Diesel Prices Show Easing
Diesel prices are key in understanding the full impact of freight shipping costs. Current diesel prices are flat on both a month-over-month and year-over-year basis.
Gap Between Truck Capacity and Load Volume Increases
DAT Trendlines reported at the end of June that truck posts (capacity) was down 26.9% from last year and was 9.4% lower month-over-month.
USMX and ILA East Coast Port Negotiations: Little Reporting to Go On
Most labor negotiations eventually follow a similar pattern, there are fits of storming, forming, and norming during a contract renewal process. The contract talks between the USMX and ILA are currently in the storming phase, after an initial period of amicable talks.
Air Freight Prices Start to Increase
Trends are keeping air freight markets stable; ton miles of freight are running at levels commensurate with the 2018/2019 period.
Intermodal Begins to Show Better Volumes
The AAR was reporting that intermodal volume was 8.7% higher year-over-year through week 26 YTD on more than 6.6 million cumulative units this year being moved (average of 255K/week).
Outlook for Diesel Prices Show Easing
Diesel prices are key in understanding the full impact of freight shipping costs. Current diesel prices are flat on both a month-over-month and year-over-year basis. Retail prices were $3.85 a gallon through early July vs. $3.85 a month ago and $3.84 a year ago.
The EIA has released its latest forecast for the rest of 2024 and 2025 and they are predicting that diesel prices will average $3.88 a gallon this year and $3.99 in 2025. These are both slightly lower than forecasts from April and are largely adjusting downward because OPEC+ has agreed to increase oil output this fall, and US production continues to set new records at nearly 13.2 million barrels per day.
Hurricane activity in the Gulf represents the greatest risk to diesel prices. The refinery sector has been relatively safe from hurricane season in the past several years and really has not had an industry-wide heavy impact since Katrina in 2005. With this storm season expected to bring higher risk levels for strong hurricane landings, it will be a factor to watch in the months ahead. For now, for budgeting purposes, it looks as though diesel prices will remain steady (barring any supply-side disruptions risks).
Transportation Briefing
Gap Between Truck Capacity and Load Volume Increases
DAT Trendlines reported at the end of June that truck posts (capacity) was down 26.9% from last year and was 9.4% lower month-over-month. In contrast, load posts (demand) was down 8.4% year-over-year and was 9.4% lower month-over-month.
With capacity seemingly leaving the industry faster than demand, the load-to-truck-ratio (LTR) was 34.9% higher year-over-year and was 7.5% higher month-over-month. The actual LTR came in at 4.72 (said another way there were 4.72 loads for every available truck in June), which was higher than the 3.88 posted at this time in 2022 and 3.5 posted last year. Many southern states were still showing LTRs above 5.5 on the back of a good harvest season.
Federal data on job openings in the transportation and warehousing sector showed 345,000 openings through May (latest available), which is in-line with levels seen in 2018 and 2019 and slightly above the long-term average. If freight volumes pick up slightly in the second half of the year as most expect, this tighter driver situation may show up more dramatically.
Despite this tightening of the gap between supply/demand, spot trucking rates were still 1% lower than last year, despite increasing by nearly 2% month-over-month between May and June. And through the last week of June, they were 1.7% higher.
USMX and ILA East Coast Port Negotiations: Little Reporting to Go On
Most labor negotiations eventually follow a similar pattern, there are fits of storming, forming, and norming during a contract renewal process. The contract talks between the USMX and ILA are currently in the storming phase, after an initial period of amicable talks. But by mid-June, talks had “broken off” and parties were working to get back to the table. All the usual hot topics have been capturing headlines of late as arguments over wages and automation lead the gap between parties.
The current contract expires on September 30th, and as the storming phase of the negotiating process normally brings, workers have been counseled to “prepare to strike”. Not to fully dispel that possibility, but it is rare for a labor negotiation to not take a similar path with similar statements being publicly offered. And then it often can come down to a quiet period when real negotiations are getting done, perhaps as is the case now.
It appears that many shippers have started to inbound freight early to get ahead of a potential work disruption.
Air Freight Prices Start to Increase
Trends are keeping air freight markets stable; ton miles of freight are running at levels commensurate with the 2018/2019 period. This is down from the peak hit in 2021 and 2022 during the global supply chain crisis and the significant movement of medical supplies and vaccines to combat COVID-19.
But the current global supply chain shows continued movement of health care products, a strong e-commerce growth rate, emergency defense and aid shipments, and interest by purchasing managers to use smaller tuck-in shipments of inventories to fill stockouts. This allows them to keep inventories lean in a higher cost-of-capital environment.
Prices for air cargo are now 4.3% higher than they were at this time last year (despite softening slightly in the latest data available between April and May). Most expect prices to remain in this range through the end of the year, barring any significant disruptions in capacity.
Intermodal Begins to Show Better Volumes
The AAR was reporting that intermodal volume was 8.7% higher year-over-year through week 26 YTD on more than 6.6 million cumulative units this year being moved (average of 255K/week). Canadian traffic is slightly weaker but is still up 2.5% and Mexico intermodal traffic is up 22.2% YTD. Total North American intermodal traffic is up 7.8% YTD.
Rail freight producer prices were up 2.9% year-over-year in May (latest available). Spot prices are going to be much higher than that, some of the Producer Price Index includes carload volumes for bulk material movement, which is weaker currently. And with over-the-road truckload capacity available and fuel prices lower, it is more difficult for rail carriers to use price as a lever to build volumes.
But volumes are up and if the National Retail Federation projections are correct, volumes will remain strong through October. That should continue to push prices higher in the second half of the year.
