Three Key Themes Emerging from Q4 Earnings Calls: AI, Supply chain, and Labor Plans
RedStone Resource
February 16, 2024
Our Commitment to Cutting YOUR Costs Continues
We are pleased to announce our partnership with The SALT Group® – the nation’s leading Operating Cost & Expense Reduction resource for Manufacturing and Production companies! Discover how you can further reduce your monthly spend with little effort and no risk.
Inside This Edition
Retail Sales Slump in January
With consumer spending accounting for 70% of GDP, retail activity carries significant bearing on the broader economy. Advanced retail sales came in flat when compared to 2023 volumes; sales were down slightly by 0.2% when stripping out food and fuel. Consumers were focused more on essential spending in January and were pulling back from elective (discretionary) spending categories.
Transportation Employment Cost Index Rises 5.0% in Q4
Employment costs are the largest operating cost for transportation firms across most modes. Fuel costs and spending are second. In the latest data available from the US Bureau of Labor Statistics, the Employment Cost Index shows an annual growth rate of more than 5%. Nationally, wages were growing at 4.5% at the end of January. Despite weaker freight volumes, transportation wages are still rising faster than the national average.
Asia to US Trade Lane Container Rates Continue to Surge Post Lunar New Year
Early in January, Asia to European trade lanes were hit first, and the hardest. Rates between Shanghai and Rotterdam are still 158% higher year-over-year (Y/Y) through February 8th, despite softening slightly from the prior week (falling by 5% week-over-week (W/W)). Shanghai to Genoa was similar, rates are up 97% Y/Y but fell 11% W/W.
Economic Briefing
Three Key Themes Emerging from Q4 Earnings Calls: AI, Supply chain, and Labor Plans
Goldman Sachs has summarized some of the key themes coming out of conference calls as executives report on their Q4 earnings. The most mentioned was the impact and use of AI and how companies were going to use it to improve productivity, reduce costs, and expand product offerings. They noted their plans to invest heavily in AI in the coming quarters, and that will also spread to the supply chain.
The second most mentioned was a supply chain update. A variety of firms mentioned that they were witnessing significant improvements in global supply chain bottlenecks and that their supply chains were intact. Others were bemoaning problems because of various bottlenecks that were emerging again and risks ahead for more potential congestion. Most firms mentioned that they needed to invest further to strengthen their supply chains further and create source diversification.
Lastly, labor planning was mentioned quite often, and it was mixed. Several firms reported that they were reducing their headcounts because of slower activity. But firms in the supply chain (ODFL was noted) reported that they were still facing some hiring challenges and demand for their services were outpacing available talent.
Retail Sales Slump in January
Retail activity is one of the more important drivers of supply chain activity, and with consumer spending accounting for 70% of GDP, it carries significant bearing on the broader economy. Advanced retail sales came in flat when compared to 2023 volumes; sales were down slightly by 0.2% when stripping out food and fuel. Consumers were focused more on essential spending in January and were pulling back from elective (discretionary) spending categories.
Food both eating at home and eating out surged in January, rising by 6.3% (eating out) and 2.3% (grocery stores). Health and personal care store sales were also higher amid a more difficult flu season and e-commerce sales were higher by 6.4% Y/Y.
But discretionary categories were lower with home improvement sales falling by 8.3% Y/Y, furniture was lower by 9.8%, and electronics store sales were down by 5.8%. Department stores were also lower, falling by 6.7% in the month while sporting goods were down 3.2%.
Consumer credit card delinquencies were beginning to rise through the end of Q4 and some speculation suggests that many households may have shifted spending to paying down credit card debt. With unemployment remaining low and job openings remaining high, this should be a short-term trend coming out of the holiday season.
Transportation Briefing
Transportation Employment Cost Index Rises 5.0% in Q4
Employment costs are the largest operating cost for transportation firms across most modes. Fuel costs and spending are second. In the latest data available from the US Bureau of Labor Statistics, the Employment Cost Index shows an annual growth rate of more than 5%. Nationally, wages were growing at 4.5% at the end of January. Despite weaker freight volumes, transportation wages are still rising faster than the national average.
This may be one of the reasons why the Producer Price Index and other measures of transportation prices in some modes are remaining ‘sticky’. In other words, when inflationary pressures should be easing (which is disinflation), the wage component of prices remain higher (or ‘sticky’ – which is an actual economic term). Prices remain elevated more than they should be because operating costs are legitimately higher. There is not much discussion of driver shortages, but job openings were still more than 386,000 across the transportation and warehousing sector in December.
Asia to US Trade Lane Container Rates Continue to Surge Post Lunar New Year
The disruptions in the Red Sea continue to be a hot topic among supply chain managers, and the effects are being felt more broadly around the world. Early in January, Asia to European trade lanes were hit first, and the hardest. Rates between Shanghai and Rotterdam are still 158% higher year-over-year (Y/Y) through February 8th, despite softening slightly from the prior week (falling by 5% week-over-week (W/W)). Shanghai to Genoa was similar, rates are up 97% Y/Y but fell 11% W/W.
Perhaps partly due to the timing of the Lunar New Year and also due to the disruption in the Red Sea and stripping of as much as 25% of the globe’s spare capacity, Asia to US rates are rising in the latest week. Drewry showed that Shanghai to LA rates were up 8% W/W and were now 133% higher Y/Y. From Shanghai to New York, rates were up 2% W/W and were up 101% Y/Y.
Rates are likely to soften, but it may take until well into March before that happens. Coming out of the Lunar New Year holidays, a surge of shipping activity coming out of China will likely tighten lanes further. But, over time, the global supply chain will adjust to lengthened transit times and capacity should eventually adjust to real demand conditions.
