July 5, 2022
Services Restored - Flexport Weekly Economic Report
While May personal income and outlays figures showed drops in both real disposable income and personal consumption expenditures, we’ve largely seen a stabilization in these figures in recent months. The significant drops were from post-recession spikes and the current levels of consumption are all up from where we were pre-Covid.
In Focus - Personal Consumption Stabilizes
U.S. real disposable income fell 0.1% sequentially in May and real personal consumption expenditures (PCE) fell by 0.4%. While this might feel like a downward trend, the disposable income figure was roughly 0.1% off from its January level, and the real personal consumption expenditures were up 0.2% from the January level.
The chart above shows the main components of PCE, adjusted for inflation, over the last several years and normalizes them so that they equal 100 for February 2020, on the eve of the pandemic recession. This lets us put this month’s numbers in perspective.
We see that only services behaved the way we usually expect consumption to perform in the wake of a recession. Consumption of services: fell by about 20% with the onset of recession; then rebounded by about 10%; and then gradually recovered over the next two years, to the point where it has only recently exceeded its February 2020 level.
In contrast, we saw that durable goods (those that are expected to last three years or more) and nondurable goods rebounded from an initial dip to far exceed their pre-Covid levels. By the spring of 2021, when the second round of federal stimulus hit, durables consumption was up almost 35%. Nondurables consumption was up roughly 12%.
Since then, durables consumption has backed off, while nondurables have held fairly constant. The rate of durables consumption, however, is still almost 20% above where it was pre-pandemic. Thus, while there are concerns about a downturn in the U.S. economy, neither the data on personal income nor on personal consumption expenditures have yet shown a serious persistent dropoff.
An additional interesting feature of the chart concerns whether broader consumption patterns are returning to normal. The normalization above belies the relative size of the different sectors. Pre-Covid, services accounted for almost two-thirds of PCE, with nondurables consumption almost twice that of durables, and those ratios held fairly steady. A striking characteristic of the Covid economy has been the sharp tilt towards goods, as shown in the chart. From 2019 to 2021, in real terms, the goods share of personal consumption jumped from 36.0% to 40.7%.
The ratios of goods to services are what we track and forecast with the Post-Covid Indicators. Lately, those indicators have been declining back toward pre-Covid norms. Yet, the ratio of goods to services can go down either because goods consumption falls or because services consumption rises. Lately it has been more of the latter.
Latest Flexport Metrics & Research
The Flexport Ocean Timeliness Indicator for Transpacific Eastbound routes improved to 96 days after falling for five straight weeks and is now its lowest since September 12, 2021. Flexport’s Air Timeliness Indicator meanwhile held steady at 11 days on TPEB routes.
Flexport research reports in the past week include the launch of our new European Logistics Pressure Matrix, which brings together eight key data points on consumer and industrial demand for logistics services as well as metrics for the level and timeliness of operations in European supply chains. Separately we showed how the fireworks industry provides clear lessons on the evolution of supply chains in the past three years.
Key U.S. inflation data came with the May Personal Income and Outlays report. PCE inflation was up 6.3% over the last 12 months, even with the April figure and down slightly from the March peak of 6.6%.
- Breaking this down into components, the inflation rate for goods has receded slightly, from 10.6% in March to 9.6% in May. The inflation rate for services has steadily risen, hitting a new high of 4.7% in May.
- This is a particular concern because it is less easy to write off services inflation as due to a temporary supply interruption. The Fed’s preferred Trimmed Mean PCE rate, meanwhile, hit a new high of 4.0%, double the target level of 2%.
EU consumer confidence fell for a ninth straight month in June to reach the lowest since the pandemic (-24.0 vs. a long term average of -10.5 and an April 2020 record of -24.7) and the second worst on record. Elevated inflation – 8.6% in June – and the conflict in Ukraine are major drivers of the deterioration as outlined in our new EU Logistics Pressure Matrix.
- The Conference Board meanwhile reported that U.S. consumer confidence is at its lowest since Feb. 2021. Consumers’ short-term outlook for the economy is the worst since March 2013 and inflation expectations are now 8% over next 12 months.
U.S. merchandise trade activity increased by 0.4% in May versus April (census basis, seasonally adjusted), with imports dipping for a second month by 0.1%. The decline in the latter was led by a 2.4% slip in consumer goods imports which are now 10% below their March peak but still 35% ahead of the same month in 2022.
U.S. durable goods orders rose more than expected in May. Nominal durable goods booking rose 0.7% over April, while durable goods prices rose only 0.3%.
South Korea’s exports increased by just 5.4% year over year in June. That was the slowest rate since October 2020 and was slightly slower than expected. Yet, on a days-adjusted basis growth was 15.0%.
- Commodities accounted for most of the growth with autos falling by 3.1%, industrial machinery sliding by 13.7% and home appliances down by 15.5%.
Policies & Regulations
The Biden administration has started trade discussions with Taiwan covering trade facilitation, digital trade, labor and environmental standards among others. That comes against the backdrop of the administration’s Indo-Pacific Economic Framework which Taiwan is not a part of.
The EU and New Zealand have signed a free trade agreement which the EU sees as increasing trade by 30% and outward investment flows by 80%.
The U.K. government has extended steel “safeguarding” tariffs which were due to lapse this week until mid-2024. The government recognizes that is a breach of WTO rules and will consult with other members.
- Legislation proposed by the Johnson administration to unilaterally alter the Northern Ireland Protocol on trade with the EU has passed its first two rounds of parliamentary review and will enter committee review before a final vote and passage to the House of Lords. The EU continues to see the move as “illegal”.
Supply Chain Update
- South Korean inventories of semiconductors increased by 53% year-over-year in May, continuing a steady build-up linked to expanding supplies of memory chips. One chip supplier has noted noted “some customers wanting to pare back their memory and storage inventory due to non-memory component shortages and macroeconomic concerns”
- Separately, authorities in Taiwan will increase power prices by 15% to cover higher fuel costs, raising costs for energy-intensive chip fabs.
U.S. durable goods orders improved by 0.7% sequentially in May versus a market expectation of 0.1%. A surge in defense equipment orders, which increased by 2.6% likely due to support for the conflict in Ukraine, was the main driver though orders for primary metals, industrial machinery and communications equipment also did better than average.
U.S. merchant wholesalers’ inventories increased by 2.0% sequentially in May, equivalent to a 25.0% year-over-year rise after a 24.0% rise in April. The rapid rise in inventories is leading to changing business practices including increased use of inventory liquidation service providers and “throw away” returns policies.
The relaxation of COVID-19 related lockdowns in China have resulted in a rebound in manufacturing sentiment with new order expectations in the Caixin survey returning to positive territory of 50.2 (above 50 indicates expansion) vs. 49.6 in May. Export expectations reached their highest since April 2021, while imports reached the best since July 2021.
The OPEC+ group has left its plans to modestly increase oil output in August unchanged and have yet to outline longer term plans. That may be a moot point given the group failed to meet its own targets in May.
- The higher oil prices (currently $110 per barrel for Brent blend) are leading governments to consider support for refiners. China may subsidize refineries if a basket of oil prices exceeds $130 per barrel. Vietnam meanwhile plans to cut import duties on gasoline to 12% from 20%. Finally, India has chosen to apply levies to discourage exports.
- Separately, the G7 group has committed to capping energy prices on purchases from Russia. This would take the form of a cap close to Russia’s cost-of-production by restricting access to transportation and insurance services.
The U.S. will extend its sanctions against Russian trade by increasing tariffs on $2.3B of annual imports from Russia to 35% including a wide range of chemicals, lumber, steel, apparel, industrial machinery and autos. That follows extensive restrictions on U.S. exports of energy and mining equipment.
Chart of the Week - Lockdowns and Earthquakes
Japan’s big seven automakers have struggled to improve production in the wake of the pandemic and systemic, persistent shortages of semiconductors. The latest data shows the global production for May improved by 2% sequentially and by 2% versus a year earlier, Yet, output is still 31% below the same period of 2019.
Production in Japan, shown in the chart above, has done even worse with 367,518 vehicles being the fifth worst month since 2009. Prior dips included the pandemic-lockdowns in April and May 2020 and the Tōhoku earthquake in 2011.
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