The State of Trade: Cracking Bullwhips Versus Packing Full Ships (June 2022)
Flexport Webinar June 2022
Global logistics congestion, elevated shipping rates and shortages across supply chains have been driven by a collision between a surge in consumer demand and fixed availability of air, ocean and trucking freight capacity. In the classic “bullwhip effect,” fluctuations in demand can first cause shortages, then overstocking of inventory, followed by a sharp dropoff in orders. Is that what we’re seeing now? Does that portend the end of tight pandemic shipping conditions? Or will packed ships and stressed supply chains persist? Join us as we sort through the latest evidence.
Speakers: Phil Levy | Chief Economist, Flexport Chris Rogers | Principal Supply Chain Economist, Flexport
Webinar Transcript: The State of Trade: Cracking Bullwhips Versus Packing Full Ships
Phil Levy: This webinar, The State of Trade Cracking Bullwhips versus Packing Full Ships. I'll say in a minute what we need all that. And we also appreciate you helping us roll with the punches as we postpone this from last week.
All right, at the end of the session, we are really committed. I know I say this multiple times, we're gonna try to do a Q&A exactly because of the kind of subject matter we have. We're doing Q&A a little bit differently this time than what we've done in past webinars. There's going to be a function called slido, we're going to drop a link to that in the chat and you can ask questions through this function. The questions that you post will only be visible to you and to the Flexport team. We're going to also share a copy of the slide deck at the end of the presentation.
All right, to make the lawyers happy, a brief legal note, please keep in mind that all information provided in this session is based on the situation at the current time and may not be customized to your specific business requirements, we always recommend reaching out to a Flexport expert to discuss your particular situation.
Okay, who are we? That's on the next slide. I'm Phil Levy, I'm Chief Economist at Flexport, and joining me is Chris Rogers, our Principal Supply Chain Economist dialing in from London. Good evening, I guess, Chris?
Chris Rogers: Yes, good lunchtime I suppose. You'd think after three years, we've got this stuff sorted out. But yeah.
Phil Levy: I don't I don't know which tea it is, which tea time high. Okay, whatever the case, we got plenty to talk about. So we're gonna move on to that.
So let me say a bit about where we're going with this, and give an overview and how we structure the whole thing.
What we really wanted to tell you was exactly what's going to happen with the US economy and the world economy, we're going to bring in Europe over the next 12 months, so you could go away and with great confidence, make investments, make business plans, get it all sorted. So we thought we'll just look at the data, we'll figure it out, see which direction everything points. And to our consternation, things were pointing in all sorts of different directions, and that's why we framed this the way we have as the sort of bullwhips versus full ships. It's admittedly a sort of logistics perspective on this.
Bullwhips, for those of you who are unfamiliar with this is a phenomenon which people often talk about when they think about inventories and supply chains, where somebody comes up short, they order more, you build up inventories, they overdo it, you get large inventories, they cut back on orders, and you get a big cyclical swing. So in this case, Bullwhip is standing in for maybe we've overdone it a bit and things are about to slow down. Full ships, of course, is no, that's what we've been having. That's what we're going to have, things are going ahead full steam.
So what we're going to do, is we're going to review a whole bunch of the evidence and tell you what we see pointing in which direction. We're going to talk about consumption indicators, and ask is the buying binge over, we'll even bring in this morning's release from the Bureau of Economic Analysis on personal income and outlays. We will talk about what's happening with inflation and what the Fed might be up to.
We will talk about inventories directly. What do we see in the data? What happens if you drill down for particular sectors or trends? If we see it ticking up? What does that actually tell us? We will look then at the unemployment situation?
And what do we what's going on with those numbers, and what is therefore driving some of the reaction. And then we will close by looking at what's going on with logistics itself? How well are things moving through the ocean and through the air. And as I said, because this is such a wild time and wild topic, we're gonna try to be very sure to leave space for your questions at the end.
All right, we're going to start as we are want to do by finding out what you all are thinking about. And so to that end, we're going to do a poll on this particular platform, you will find the poll over on the right hand side of your screen. There's now a little dot on the poll section and let me pose the question that we're going to ask you.
What we'd like to ask is, what will the US economy do over the next 12 months? And here are your options. We're going to have a soft landing, GDP will keep growing, inflation will fall, everyone will be happy.
Option b, things are out of control. inflation's just moving ever upwards. D, hard landing, these rate hikes will work and they'll bring us a recession. D. We're already in a recession and it's just going to get worse. E, you get to punt no idea that's why I'm here.
So, I'll ask you all to fill in your votes. We'll see what you all think, and of course, then hopefully, we will be giving you useful fodder to revise your opinion as we go along. So I see lots of votes coming in. I see that you all are as perplexed as we are, it would have been disturbing if everybody had settled on exactly the same number.
But I see, at least for the moment, that the winner, It's neck and neck, optimism is losing badly. But we certainly have a majority between the Oh, coming around the final band its part landing, is hard landing, is recession. Okay, no, I'm not going to try this. In any case, very close between hard landing, and we're already in a recession, and it will get worse.
All right, we thank you for that, that certainly sets the stage as I think I'm actually going to end up more a little more optimistic than you all. So maybe leave here feeling better than you came in. But let's see what the data says and talk through some of these things, and see where we're going. So let's, let's jump right in and let's thank you for the votes on the poll.
Let's talk about what's going on with consumption. And there's, and I want to go to our first sort of data slide and use this.
U.S. Real Income Growth Slows
If we talk about sort of what's happened all along, that we're gonna show you a bunch of graphs like this, and one of the conventions that you should get used to, is this vertical gray bar, that kind of lets you find your place in time. So that marks off what was the recession. So in this case, it was the very brief but very sharp recession that came with a COVID onset. So it lasted a couple of months, that's what that time period looks like.
So this is kind of a background, because one of the things that determines consumption as a key determinant of consumption is how much money do people have in their pockets. And that's what this one is really showing, and it's odd. Because normally in a recession, you would say, well, things slow down, and people have less money in their pockets. Look at that line on the top, the top line is real personal income. So you'll see us use the term real frequently, that means we've already adjusted for inflation. We'll show you some inflation figures later. But that becomes particularly important, since about the spring of last year, because you'll get very different numbers if you use nominal versus real figures.
So here we look at real figures, and that top line doesn't look quite what it's supposed to in a recession, you normally think that there'd be a big dip, and then we recover. And since there's no dip whatsoever, in fact, we have a couple of spikes, the lines down below, give us some clues where those spikes are coming from. Because those are real government transfers to individuals. So what we see is we had a number of those spikes, real personal income never went down to where it was pre-pandemic.
The spikes themselves have stopped these claims with things like the Cares Act, or the American Recovery Program. That is all settled out. So really, that black line is looking fairly tranquil as we go along, and I believe we didn't put in this morning's numbers, but I think that actually stays relatively constant, I'd have to double check on that.
So what we see is a couple of things and then close with on this slide. You see that the government transfers is sliding back to where it was pre-pandemic. This is a bit of a question, so we're not pumping money as much into people's pockets will that flow consumption down? It might. Now there's an offsetting effect where people might get higher incomes and that's where we're that can boost the amount of money in their pocket.
The other thing is that green line down on the bottom, which is what happened with personal saving. Now, that's certainly dropping quite a bit, but what are the things to note is the big surges in income that came earlier, left people with packed bank accounts, not across the not even across the income spectrum, I believe, obviously, you know, upper quintiles of income did better than and have more. But this is one of the things people watch when they're trying to figure out where consumption going is, how much of that bending war chest is still there, and at what rate are people willing to spend it out?
So the bottom line that you take from this picture is we haven't really seen sort of crashing incomes or anything of that sort, which would presage a big drop in consumption. So this looks a little bit more like steady as she goes, would you concur with that, Chris?
Chris Rogers: Yeah, I think that is what you're seeing from the incomes. I think when we look at other parts of the world. There is an issue that they a lot of the government spending schemes weren't as generous as they were in the US and they didn't go straight in the bank account. So for example, there's concerns in the UK, already that like people savings are being run down pretty rapidly.
We're not seeing pay rises, certainly not in real terms. So yeah, I probably will be watching that green line, because that's a sign of where people will start to panic a bit. We've got a slide later on, on consumer confidence. But yeah, absolutely, you know, total incomes barely moved compensation up a little bit, yeah pretty balanced.
Phil Levy: Yeah and that's just it's a very good point that this differs from country to country. But this is one of the things we watch, is to see, do people have money, and you're right. Your point about real incomes, not going up in the UK, they have it in the US either.
One of the things we've seen, we've started to see very rapid wage growth, we'll talk about that. But we have not yet really seen that, you know, push those that income bar upwards. So far, it's stasis. Let's go to the next slide.
U.S. Personal Consumption
And the next one is going to talk about, all right, we talk about what sets the stage for consumption, here's what's happening in consumption. And we got up early this morning to make sure that this would be updated and have the freshest hottest data for you, which unfortunately, at least for the top line, the blue line looks like was this chart downward, jagged at the end. Let me first set this up, and then we'll talk about why we have a droopy blue line.
So, this is trying to look at the major components of consumption, personal consumption. And to allow for easy comparison and reference to where we were pre pandemic, we normalize everything. So even though these sectors are not at all the same size, services are much bigger than the non durables, non durables is significantly bigger than durables. The way we do it here is that for February of 2020, everything equals 100.
So now you can look at the movements from there, what you see with this, there's a sharp downward movement than the onset of the recession, again that vertical gray bar, timing that for you. And then the point I'd like to make about this graph, only services behave the way we would have expected a recession and recovery to look. Where you get a sharp drop, and then a gradual recuperation to the point where I think we've just exceeded in real terms, again, where we were on the eve of the recession.
Those of you who have been experiencing congestion and logistics, and you know, seeing the packed ships, as it were. The top two lines tell you where that's coming from. Because after that initial downturn, we saw an extraordinary binge of goods consumption. And that's why we set this up this way. So that you can actually see that mapped out.
The blue line is looking at durables. This is saying that by the time we got to spring of last year, durables consumption was up 35%, over where it had been pre-pandemic. That's not inflation, remember, this is already adjusted. That's an incredible surge. And those things all need to move in containers, and there were a lot of containers and a lot of ships and things got very congested and prices went way up.
What have we seen since then? Well, we've seen that ease off that peak, as we know, we weren't really stoking the income fires the same way after that. It's eased off, one of the things that means is, in general, if you look at year over year numbers on consumption, they look pretty grim, because we've dropped off that peak.
There's another way to look at this, and in fact, now I'll get to the end of that blue line. The number this morning was that durable goods consumption, real terms, has dropped something like 3.5% in a month, which sounds really quite alarming.
There's another way to look at this, which is something from, you know, the middle of last summer, around July of ‘21, we've been holding at durable goods consumption about 20% above where it was pre pandemic. It goes up, it goes down a little bit, but it has fairly helpful even. And actually if you look at non durables consumption, it has gone down ever so slightly, but again, actually, that one looking from about February of ‘21, it's been holding it 10 to 12% above where it was pre-pandemic. In relative terms, these are looking worse relative to services. But this doesn't look like a plunge in consumption. It looks more like a plateau and an easing off from the real boom of last spring. Chris thoughts on this one?
Chris Rogers: Yeah, so actually, I'm really worried about this one because whilst it's not moved very much, it's still 20% above where it was pre-pandemic. So, if big if we see returns pre-pandemic spending levels, that's a 20% drop in real spending on durables, and we'll talk about logistics later on. But bear in mind durables are really really big, and non durables are really really small. So there's going to be like an outsized impact on the amount of shipping going on as that durables number comes down.
Phil Levy: So the technical definition is vast in three years or longer, but I think it correlates really well.
Chris Rogers: It does. Yeah, absolutely. So I'll bring some alternative economic nomenclature, there for you Phil.
Phil Levy: Appreciate that. All right, good. Well, so you're right, this is an interesting thing. We've tried to track, by the way, the other reason why we had focused on this was that, if you look to the left of those gray bars, you'll get our pre pandemic era, this was nowhere near so exciting, that you saw a fairly constant balance, a ratio between goods and services spending. So what one of the things we've been watching for is, when does that ratio come together? Of course, a ratio can come together in a couple of different ways, you can either take the top line and have it come down, or the bottom line can come up. Let's go to the next slide, and see what we've been looking at with this.
U.S. Goods Preferences vs. Services
So this is exactly that. Looking at that ratio, it's scaled a bit, we don't have time to get into the details of how it's scaled. But suffice it to say that we've done it to that zero would be a return to where we were pre-pandemic.
This is our post COVID indicator where we're trying to, and the virtue of looking at this one is, it doesn't stop. In the recent month, it actually go several months forward, because we're actually forecasting this out. And what you see here is a forecast, not updated for today's numbers, but in which we actually had already been forecasting that nondurable goods were falling more into line with the traditional ratios that we've seen, durable goods, we actually did show a bit of a downturn, I don't know if it was quite as extreme as what we actually saw. But this is things drifting back to the normal ratio. But reminder, that can happen because services are going up or because goods are going down. Either one would kind of get us back to that earlier ratio.
All right. Now, let's go ahead and look at what Chris had foreshadowed a little bit earlier. What we're seeing in terms of consumer and industrial confidence on the next slide, please.
U.S. Consumer and Industrial Confidence
All right. This doesn't look good. What are we looking at here?
Chris Rogers: Yeah, so there's two lines on here, the black line is from the University of Michigan, it's their consumer expectations. So basically…. (interrupted)
Phil Levy: ( ) Michigan in blue?
Chris Rogers: No, I missed that opportunity. But it's indigo blue, it's not quite the right color. Maybe for next time, I'll put a little mascot, as well. Yeah. But look, the dotted line is the past 10 years average expectations. So you'd normally expect it to kind of swing up and down a bit up and down a bit. And we've actually seen it collapse. So consumer confidence is kind of decadal, that’s a word that is. Now the lowest it's been in, in many many years. Manufacturing import expectations aren't quite as low yet. So this is saying that right now next month or so that's the purple line, pretty much in line with its long term average. So manufacturers in the US aren't planning on cutting back their inputs yet, but consumers are pretty negative. If we go to the next slide, this is the same thing.
EU Consumer Confidence Sudden Swing
But for the US, excuse me, for the EU. Unhelpfully I've not colorized these rights. So the blue line in this instance is consumer confidence. To make the point that consumer confidence in the EU, the only time since 1985, that it's been lower than this was actually in the depths of the pandemic. So, I think and I'd also note, like how quickly that turnaround has come really, you know, late last year when the routes began to set in. So, you know, consumers have turned really quite negative really, quite quickly. And so they might not have changed spending behavior yet. But the confidence has certainly evaporated. I know what you think of that, Phil, whether that's like a causal thing that we've seen in the past or, or whether this is just people responding to surveys?
Phil Levy: I think it's a really interesting question, and on some of them, I don't know the EU numbers as well as I know the US numbers, but they'll do breakdowns. And they'll ask people, which parts are you responding to? And what do you actually think about and they'll do distinctions between what do you see as your current situation? And where do you think things will be either in one year or three years for the future? And I think it raises an interesting point, which is, again, maybe the reason why we focus on this, which is, many of these things can be self fulfilling, that if you've heard news, you're worried about inflation, you're worried about if you're in the EU, you're worried about whether you're going to have gas to heat your homes next winter.
You may say these are difficult times I'm pulling back. And if you do that, that can of course then have a self fulfilling effect because if everybody pulls back then you start seeing things like consumption numbers drop sharply.
So I think there's been a lot of news, I heard, I think this is baseless. And where I have seen people specify what's driving this, it often comes, especially from things like inflation forecasts and inflation numbers.
Chris Rogers: Yeah, absolutely. And in fact, if you go to the next slide, that self fulfilling prophecy thing you can actually see.
EU Retail Sales Already in Decline
So this is retail trade, real terms, excluding food, fuel and autos. And effectively it's the sequential change month on month and seasonally adjusted. And you can see here in the EU, we actually saw a drop in retail sales, particularly stock in Germany, which is you mentioned, where they've got rapidly rising costs, particularly for natural gas.
So you know, to a certain extent in Europe, retail sales have already turned over, and as you say, those surveys can be broken down in the EU survey, it was absolutely inflation, that was the biggest issue. We should talk about inflation.
Phil Levy: We should. Good idea, Let's go to inflation. We're breezing along because like I said, we do want to get to a Q & A and there's so much to talk about. All right, so what can we say about inflation? Well, let's look to see what it looks like. We'll go to the next slide, please.
We've crossed out transitory, that's old news. Although I would note, if you look at what the Fed says, they don't use the word transitory anymore. If you're a geek, and you say, hey, I think I'll read the Fed statement of economic projections, it says transitory. Not in so many words, I'm paraphrasing, but essentially says inflation is going to go away.
So one of the tricky things about talking about inflation is we've got a whole bunch of different measures, there's not a single thing, it's which basket you pick. And there's popular ones, like the PCE, which just got updated this morning, I believe it came in at 6.3%, again, for the full number 4.7. For if you take out things like food and energy, which are often volatile. But what we show in this graph is we show four different measures, we have the Producer Price Index, the Consumer Price Index, and the personal consumption expenditures index, that's the green line, and then there's a really modest one, which actually happens to be the Feds favorite, which is a variant called personal consumption expenditures trimmed mean, where they take out what they see as the volatile bits on either end, either things that seem to move up an awful lot are down an awful lot, and they look at what they see as their version of the core, you also hear core expenditures.
Alright, so we're not going to be helping you select among these now, because actually, each one of them tells a different story and you can work something which is why we show. First thing I would note is thatI take from this graph is that we actually can kind of date when this got to be an issue. If you look at this graph up until, you know, say the start of 2021, there's really nothing very impressive going on here, right?
You had a dip and some things, especially producer prices, but basically flat and are actually hanging out roughly around, they all kind of converge right around 2% which, not coincidentally, is right where most of the central banks want it to be. Most of them don't actually target zero inflation, they target 2% inflation.
So if you're looking at this, a year and a half ago, it kind of looks like everything's going swimmingly, this is fine on the price front. And then we see things really shoot up.
And this was the bit where transitory was the hypothesis. The idea was, yeah, shoot up a bit and it's gonna drop back down on its own, and it hasn't so much. We do see things kind of leveling off.
One of the big concerns here is that as we talk about things like food and energy, and as you look at the stuff that you see there on the top line, the Producer Price Index, these are often things that feed in to future production, to future costs. And then and they don't really when you see numbers that high, it's not really presaging a big drop off. The theory I think of the drop off was understandable. It was the stuff we looked at a little bit earlier, like the durables where you're gonna get a big surge and hey, once you've bought all the sofas and TV sets and exercise bikes that you can buy, you're set for a few years is going to ease up. Well, as we showed it hasn't quite.
And so we've seen this sort of very steady thing, and of course, in the midst of this, are you doing separate EU inflation later Chris? Are we talking EU inflation? Right now.
Chris Rogers: We can touch on it a little bit later, I've got the chart later.
Phil Levy: We'll do it a bit later. So let's just say for the US part, you see a fair bit of persistence, and we haven't really seen the drop off. Let me talk a bit about where this is coming from and what's going on with the Fed changes. Because I think a lot of time, for those of you who think either we have a recession or that the recession is right around the corner, is going to be alarming news about the Fed that may have triggered some of this. So let's go to the next slide.
Quantitative Easing Peaks
If we want to talk about what the US Fed has been doing, there's really two components to this. This is the first component, it is sort of the unusual component, which is quantitative easing. They didn't always call it that. But this was, the Fed was faced with a problem around the time of the pandemic onset, which is that they could take interest rates, their Fed funds rate down to zero, and I'll show that in a second. But once you get to zero, what are you supposed to do? Well, the EU actually had an answer for that on rates, which is zero. Why is that a problem? Let's go below.
But in terms of the Fed, they said, you know, what we're going to do, we're going to expand our balance sheet, we're going to go out and buy bonds, and when the Fed buys bonds, it creates money. And so what this chart shows is the tally, that essentially you had a Fed balance sheet that has the different components, whereas US treasuries, mortgage backed and a little bit of other. But essentially, the balance sheet on the eve of the pandemic was about $4 trillion, and the peak got to be about $9 trillion.
All right, you see that it kind of curves off there at the end and sort of flattens, these were the announcements we had several months ago, when the Fed, the Fed had said that before they did anything on interest rates, they were going to stop this program. Stopping this program did not mean selling everything off and getting to $4 trillion. Stopping meant, we're not going to cease the purchases that we're making this go up. And then we're going to do that gradually. So we're going to buy a little less, then a little less, then a little less. That's where you see that slope flatten, we have not really had the Feds slam the brakes on quantitative easing, you see that this sort of plateaus at the top, I think it was just last week. That they maybe let some bonds mature, and so the overall numbers may have nudged down ever so slightly. But for the most part, this is still pretty expansionary. We have a very generously expanded balance sheet. And it's also as a technical point, you'll see that big blue section on mortgage bank assets, the way the Fed is trying to let these things go as it says when they mature, then it won't necessarily renew them. For some technical reasons that we can talk about if somebody is really eager and puts it in the Q&A. That doesn't happen so much with mortgage backed bonds in a period of rising interest rates. So how much this is going to fall off as a question. Let's go on and look at the next slide where I'm going to get to the conventional thing, which has been making the headlines, which is the effective Fed funds rate.
Rate Tightening Starts
Now, one thing to note on this, we've scaled this chart, we've done it so that you can see all the movements really vividly, but it means that the top line here is two and a half percent.
The expectation is that if we look at these things in a year or so, that top line is going to be more like 4% 5% to fit in what we're talking about. But these are still pretty low numbers. But let me, Okay I'm getting ahead of myself.
What we saw was on the eve of the pandemic, the Fed funds rate had gone up, it had actually come down a little bit right before so we were not at a very high number, we were at about one and a half percent of the Fed funds rate. And then what you see is during the pandemic, Fed drops to zero, because we're gonna have zero interest rates, and it held there up until quite recently, then we had a couple of 50 basis points or 25 basis point hike, basis point being 25 basis points is a quarter of a percentage point. So we had 25 basis points, then 50, and then we had a 75 basis point hike.
So you see that this actually gets us right back, it would seem to where we were on the eve of the pandemic. However, there's another way to look at this. And so let's go to the next slide.
Rates Still Deeply Negative in Inflation-Adjusted Terms
And that'll give us the other way to look at this. This is, the previous slide showed the thing that you read about in the newspapers or your, you know, online updates, which were what is the announced Fed funds rate. This, does this in real terms and subtracts off, what's the inflation rate? So which I would argue is economically more meaningful. I would also if you don't trust me on that, take it from the Fed. That's what the Fed will talk about. They will say that they see a neutral rate as a zero to 1% real Fed funds rate.
Well, here's our version of the real Fed funds rate, this is not official, but we do is we subtract off the most conservative of those inflation measures we showed you the trimmed mean PCE. And what you see is that we actually have an aggressively stimulative monetary policy at the moment. It's turned around a little bit, but we're looking at something like a negative three and a half percent real, Fed funds rate maybe that's blipped up to more like negative three. Anything negative is certainly seen as stimulative so what this would argue is the Fed has quite a ways to go before it even gets to neutral. So we really can't talk about the Fed having slammed on the brakes. The really key question is as we look forward, how does it get to that neutral range that it has told us it wants to get to?
How does it get to that neutral range that it has told us it wants to get to? The, there's two ways that can happen. One, inflation subsides on its own, that's the transitory to radio. So you go a very modestly with the nominal federal funds rate and inflation slides in nicely below it, or inflation looks persistent. And then you need to keep hiking interest rates until you get ahead of inflation. That's a very big question. And we'll, but that's a lot of what people are uncertain about going forward, I would argue that we're more likely to have the latter than the former. Chris, maybe you can say a bit about what we've been seen with inflation in the EU, which has had some different driving mechanisms, right?
Cris Rogers: Yeah, absolutely. I mean, if you go to the next slide, please.
Multi-speed Inflation Tough To Manage
This is basically consumer prices, CPI equivalent in the euro area. So the black line is the euro area, inflation, currently a little bit below 8%. If you take the EU 27 overall it's a little bit over 8%. And that's been dragged up by the Netherlands, some of the Eastern European countries. And this is before a lot of the recent increase in natural gas prices linked to the conflict in Ukraine have really taken effect. Now, one of the reasons we've got the different countries on here is that it shows that the job of the European Central Bank to try and manage inflation is way more complicated than it is for the Fed.
So Fed, one country, one fiscal system, lots of differences at the state level, I know. But the ECB is trying to wrangle 27 different economies at the same time. And as a consequence of which, there's a much bigger risk that either the ECB like doesn't tighten enough and inflation stays high, or it tightens too much, because it's trying to manage the peripheral countries rather than the core countries down.
So that's a lot of volatility, a lot of uncertainty. I would say this whole business about when will the percentage inflation rate come down is important, because once we hit kind of November time, you're then comparing year over year to a period when commodity prices were already coming up. So the inflation rate might come down. But that doesn't mean that prices are coming down, it just means you're seeing a statistical anomaly there. And before we leave inflation, my least favorite factor at the moment, UK inflation is currently 9%. The last time UK inflation was 9% was in the early 90s. And interest rates then were 15, one five percent, that's 10 times higher than they are right now. So to your point Phil, about will central banks need to kind of, you know, push over towards having proper tightening rates that I guess my concern there is interest rates, whether it's in the UK, the Euro area, or the US could have a lot further to go than maybe people realize.
Phil Levy: Yeah, so one big thing to watch is, do you get sort of a happy situation where inflation comes down on its own? Or do we see something, like you said, where you relive that early 90s experience when we get very high nominal rates? The other thing that I would, as we're sort of leaving people with takeaways on this, that to me, there's a very big question about food and energy, that they put in energy are often sort of pushed off to the side, not because we don't care about them, but because frequently it's, well they're volatile, they hop up and down, but they're hopping up and down around the same mean, and therefore, they're not good forecasters, let's look at core inflation indices and that's what we're really care about.
I think there's a question here, and Chris you've got energy expertise in this, whether is this food energy hopping around, or is this something secular, where you're seeing I mean, the energy price numbers that come out of Europe are astonishing in terms of how fast that inflation has been. And then once the stories about things like, well remember, if you have a shortage of gas, you look at German industry for example, that often gasses an input that sort of starts these production processes, not just you know, the also important rule of heating people's homes. There's a question of whether those things as inputs feed into lots of other things, whether with the food sector, whether you're having various things that sort of go into fertilizer and other stuff. Any thoughts on that? And this forecast of, is that going to be something passing or a persistent worry and cause?
Cris Rogers: Yeah, so we wrote a lot about natural gas. If you go to our website flexport.com/research. In the Ukraine conflict section, we wrote about natural gas a little while ago, you're absolutely right that natural gas is an input for the petrochemical industry and the plastic industry, in the US actually as well as in Europe as particularly an issue for Germany. And so, yeah, that there is that feature, I think it is secular as well as cyclical because what a lot of the European Union countries now want to do is reduce their gas exposure and energy exposure more broadly to Russia. And obviously, if there were cheaper sources of gas out there, we'd already be buying them. So moving somewhere else for your gas is going to cost more. So I think it is inevitable that you will see kind of a higher price for natural gas. For oil the jury's out of it, because there are lots of different sources of oil. And if Europe buys less Russian oil, China will buy more. So you might see a balancing out there. But we're looking at really a process of at least a couple of years for this to balance out. The other point as well, of course, is that Europe's trying to decarbonize its economy more broadly. And that's going to come with costs as well. So yeah, I think energy generally is just becoming more expensive over time.
Phil Levy: Yeah, and but that's an input cost, of course.
Cris Rogers: Yeah.
Phil Levy: Which then tends to be one of those predictors of where goods costs come out later. Alright, lots of interesting stuff to watch there. We've been talking a lot, we want to hear a little bit of what you think. We also want to turn to this topic of inventories. Because, remember that was part of our premise of the whole bullwhip effect that one of the things that we wanted to ask about was, are we seeing this? Are we seeing a big buildup in inventories? And Chris is going to give us a rundown on this in a second. But first, for those of you who are aware of what your company might be doing, we want to know what your experience has been like.
So here's some potential responses for you. You could say we've deliberately increased our inventory for general precautionary reasons. Or we've deliberately increased our inventory because we're worried about supply chain interruptions. Or our inventory has gone up more than we wanted as sales have slowed. Or we'd like to have more inventory than we do, but we can't find the space. Finally, we offer you, we'd like to have more inventory than we do, but we can't get the goods. So then let me, oh I see were already getting quite a few votes in there. But would welcome your feedback. What are you all seeing out there, what is the mix? What is the balance? It's one of those things where we can sort of watch the average numbers, but the motivations are fascinating and knowing you know where you are on this. And actually, it looks like there's quite a split with different responses on this. I want to give this a moment more, thank you for those of you have voted, for those of you who haven't yet, take your best guess, see which answer is closest, and we'll see what we come up with.
All right. So at the moment we have a narrow plurality winner with our inventory has gone up more than we wanted as sales have slowed. But a close second behind this is, we've deliberately increased our inventory because we're worried about supply chain interruptions. Chris what have you been seeing on inventories? And thank you for again, for everyone who's voted.
Cris Rogers: Yeah, thanks, everyone. So I think the important point here actually, is the 70% of people here at fact more 77% have said, the inventories have gone up. And I think that's an important differentiator to where we were if we had this call several months ago where like, inventories were low, the shelves were empty, like nobody had got anything for anything. If we skip onto the next slide, please.
U.S. Wholesale Inventories Already Rebuilt
What we've done is a whole bunch of analysis. And again, you can find this on the website, where we've looked at macroeconomic statistics and then we've drilled down to corporate statistics. And the words through this pretty quickly so that we can get to your questions. But this slide is showing you US wholesale inventories. So this is basically what's on hand at central distributors rather than what's like in the stores that you see. And we're looking at inventory to sales. So this is basically the ratio of what's in the warehouse, versus what's actually being sold in a given time period.
The total on the left hand side in 2019, roughly speaking for all companies in the US, the inventory to sales ratio was about 1.4 times. That dropped during the pandemic and because of the boom in demand that we saw. But it started to pick back up. And we're not back to the pre pandemic period yet. And that's why you'll see kind of this confidence that, okay, we're going to continue to see more activity because inventories are going to be rebuilt. That's all coming through.
When you actually drill down into the numbers, what you actually find is that for many sectors we're actually already above that pre pandemic level. So in this chart, the purple bar is where we were in April. And we're already seeing there that for some of those durable sectors, particularly hardware and also for some of the non durable sectors apparel, we're already a long way above the pre pandemic level. We had a question come in already about some specific names, we're not gonna talk about specific companies, but I think you know, generically speaking you can see that there's very different experiences going on in different industries. First of all, just to step back a little bit, you talk about how kind of inventory activity plays into kind of GDP and economic growth more broadly. Phil?
Phil Levy: What, let's see, oh, how is GDP, I think it's the sort of transmission mechanism of all of this. And you'll often see it in GDP numbers, where we've seen some, in fact it was a, when we had the big downturn number for Q1, the one of the big things that was going on that was you had actually seen an inventory adjustment. And people would take it heart that despite the big downturn if you sort of set those inventory things aside, consumption and investment look reasonably strong. So it is one of the intermediating factors. But again, the modes can be hard to read.
Cris Rogers: Yeah, actually if we talk about motives for a second, if we, so we asked the question, if you go to the next slide.
U.S. Warehouse Rates Reflect High Occupancy Rates
We asked the question about like, can you store it, we'd like to have more, but we can't find the space. Not many people said that was the case. Although when we look at what's going on with warehouse pricing, which is what this chart is showing, it has kind of increased pretty steadily last year, it's stabilized more recently, but warehouse pricing is still very high. So that might be kind of a challenge for companies that have got these higher inventories. And it's not just a US issue. If we go to the next slide.
EU Stocks Low in Capital Goods-intensive Countries
We can see like the same sorts of figures for the EU. Now in this instance, what we're seeing is the balance of stocks of finished goods, where zero is effectively were adequate, and anything below zero is we're short. For the EU overall, you can see there that actually we've seen a recovery more or less to within striking distance of adequate. I put Germany and the Netherlands on there, because Germany is very focused on heavy industry. And so heavy industry clearly is still under supplied. Whilst in Netherlands, which is more focused on commerce and retail, they're already well above that level. Now, what we've also done is take a look at financial data. It's on the next slide.
Inventory Rebuild Already Underway for Two Quarters
We've taken a look at 1400 companies quoted on the New York Stock Exchange in the NASDAQ. And what we can see there is that the rate of change in inventories versus the rate of change in revenues swapped over, so that gray bar, which was negative for several quarters, during the pandemic has now switched to positive. So inventories are increasing quite significantly more quickly than they are for revenues. And in fact, for some companies now, and we're about to start the second quarter earnings season, we're actually going to see revenues turn into negative territory. So a contraction in revenues year over year. The last slide in this section actually looks at a certain next slide is.
Most Sectors Already Above Pre-pandemic Levels
Looking at this inventory to sales ratio, again, based on corporate data over the past decade or so. So for the first quarter of the year, how do inventory sales look over time. The black line or the black bar is 2022. The purple line is 2011 to 2019. What we're seeing there again is that, for five out of eight sectors we're already seeing inventories back at or above the pre pandemic level. And in retail specifically, which is the right hand cluster of bars, they all are, except for E-commerce. So putting aside the E-commerce firms, most regular stores have already pretty much fill, refilled their inventories versus their sales. And so we see a downturn in sales, which is perfectly possible given what we've been discussing so far. Then there's already too many inventories there and that of course will mean that we'll see a lot less shipping relatively quickly. Anyway, that's a quick fly through on inventories Phil, I don't know if there's anything to add to that.
Phil Levy: No, we're not quite doing it just as you have in other writing, nd I would recommend people go and read that. But I think what we take as a bottom line from this is, if we're thinking about this bullwhip effect, this is where the evidence comes from a bit, as you're seeing an inventory rebuild, particularly if you focus on certain sectors and you do a nice breakdown here. But the story that one would take from this is, this could be taken as an indicator of a slowdown to come, that as you get bigger inventories that had higher levels, fewes orders and slower production going forward, right?
Cris Rogers: Yep.
Phil Levy: All right. So let's do a contrast. Let's kind of move ahead and say, all right, if that sort of convinces you that things are slowing down, here's why we're a little bit befuddled. With our section on everyone has a job, nobody's happy. So let's see how many people have jobs. Next slide, please.
U.S. Labor Market Tight on Most Measures
If you do, so the measures of the job market, that you're probably most familiar with are things like, what is the US unemployment rate, if you're based in the US, and you know whether it’s was 3.6, 3.8%, it's been hovering in that range, which seems extraordinarily low. But there's some of these measures which actually make the market look tighter than that. And there's some economic research, which argues that these measures are actually more relevant. So I'm going to give you a couple of numbers here. And we're showing you charts that put things into a longer perspective. So you can see how historically tight the US labor market is.
So the chart on the left, what are the things about an unemployment number, obviously, this is lovely number, wonderful, easy to follow. But it depends on a couple of things, you're only unemployed officially if you are out looking for a job, if you've decided that you've had enough of all that and you're not going to look you're frustrated, or you're retired or whatever, you do not count as unemployed. The chart on the left accounts for that, because it's actually looking at employment to population ratio. So it gets out of this question of, are you trying, are you trying hard and so forth. And it also restricts itself to the age range 25 to 54 to largely set aside the demographic question of, did somebody decide to retire, retire early, or so forth. And what we see is, that we are at one of the tightest points that we've been at in about 20 years, that we, there was stuff earlier, and that may have had to do with various demographic things, and things moving in the labors. But if you look for about the last 20 years, the peak of employment to population has come right around 80%, you see that we had an enormous drop in this. That was the depth of the of Covid pandemic, which far exceeded what we had had an earlier recessions, those earlier gray bars. But we're really pretty much back there.
The second chart in this graph, I think is even more striking which is, it's a different way of measuring tightness which is, you have a listing of how many job openings are there, and you also have a listing of how many people are listed as unemployed? What is the ratio of those? How many job openings are there per unemployed person? If you look prior to the Covid pandemic, you saw, this was a number that would swing at its worst, you know, it's more like point two that was right after the global financial crisis. And as best it was around 1.2, that was actually read on the eve of the Covid pandemic. But that was about the range it moved in. And so you can see, and even with the global financial crisis, it was a dip down from about what point seven to about point two. And then took a few years, but it rebounded. We're now at about two, two jobs per unemployed person.
So this is an extraordinary level of tightness for this. What does that mean? Well, one thing it means, you’d think people will be happy about this. Chris is going to give some evidence on this later. But a second thing it means is, people like Larry Summers have argued, we've never seen anything this tight without wage pressures. And anecdotally, we hear stories about wage pressures, we, if you look at the Atlanta Fed wage tracker, it's showing wages increasing, not quite at the inflation rate. But that's what this stuff tends to presage, often people are on contracts where it gets renewed, you hear certain companies like a large airline, for example, that reaches a new labor contract with sort of fairly large numbers. So this is the tightest, this does not look like a recession. You can see what the recessions look like, because the recessions are the gray bars, this stuff is kind of plunging going down very low numbers. We are as far away from that as we have experienced. All right. Next slide please.
EU Unemployment Varies Widely by Member State
Unless Chris you wanted to comment on the US. But you can tell us what it looks like in the EU.
Cris Rogers: Yeah, I'll talk about the EU. So I think I've used the simple number here, because I'm a slightly simpler economist than Phil, but I’m also Eurostats, not great in terms of getting those figures. But more importantly, what we're seeing the black line here is unemployment in the EU 27 in total, and it hasn't been this low. Well, I've got data going back here to January 2002. Not been that low since then. But back to that point you made earlier about the difficulty ECB will have in terms of managing a soft landing, you look at the difference in rates across different countries, and how that shifted over time.
So back in 2006, unemployment in Germany was above the European average. Now it's way, way, way below the European average. And that's partly because there's been some significant labor reforms over that period brought in by Chancellor Schroeder and developed by Chancellor Merkel, that's changed the nature of the labor market. Spain on the other hand, has gone the other way. Inflation excuse me, unemployment used to be well below the EU average, now it's well above the EU average. And that's a lot to do with kind of systemic changes in how the Spanish economies works. And a lot of that unemployment is amongst younger people. So There's a difference in the in the mix there.
But key point, very, very low unemployment rates in the EU. So similar pressures you'd expect in terms of wages. Now, question is a how sustainable that unemployment is. Because frankly, if we start to see companies laying stuff off if we start to see a downturn that could turn around relatively quickly. And are people actually getting a pay rise. So if you look at the next chart.
Reminder: Everyone’s Employed, Nobody’s Happy
We've already shown you this chart, but, you know, effectively what I've done here is put side by side US consumer sentiment and the EU consumer sentiment, you can see how they both broken below their 10 year averages quite significantly. Question here is, is it because people have got a job and they don't like the job they've got because it's not paying enough? Or are they worried they might lose that job? Or are they just worried about the state of the world in general. For me, on the EU side when you break into those numbers, it's largely because of concerns about inflation. You've got a job it's just not paying enough. And concerns about the state of the economy over the next 12 months. I, will I still have this job that doesn't pay me enough in 12 months time. I guess for the US the shift has been more stark, I know that's because Americans were more optimistic in the first place.
Phil Levy: Well, it's interesting you look, and we showed earlier that it was right around the beginning of 2021, that inflation was really coming on, this at least correlates well, that doesn't necessarily give us causality. But I think you’re right, you have that concern. And to wrap this section, I would say, it encapsulates part of the contradictions that we're looking at. Would that, you know, we would normally have said that, whether it's for the EU or for the US really tight labor markets like this, that historically good unemployment numbers should be cause for celebration and should very much be the full ships, full speed ahead. But these kind of concerns sort of temper that a bit. And then there's the question of what this means for the response. Why don't we move on from here, because we’ve vowed as solemn vow to get to questions. But we don't want to skip the question of what's been happening with freight. So Chris, you wanna talk us through this?
Cris Rogers: Hey, you promised to get to questions, I didn't. No we will get through it.
Phil Levy: Yeah.
Cris Rogers: So look, when you look at trade activity and this is the Flexport trade activity forecast or TAF, you know, the expectation is that we're going to see trade go up and up, which of course it will, because commodity prices are up, inflation's up. That's driven up trade activity more broadly. Now, clearly, the question comes like, if we take inflation out of these numbers, what does the world look like. And if we go to the next slide.
Port Activity - Beware of Short-term Data
What you'll see here is we've taken activity at the nine biggest ports, and looked at how that's changed over time. So effectively, the gray lines are the history, the light gray line is 2017 to 2019. 2020 obviously had disruptions early in the year because of the pandemic. 2021, actually, you know, demand was pretty constant or use of ports, I should say, was pretty constant throughout the year. And it's important to note that that means there wasn't a peak season or even an off peak season where systems could adjust. The green line is 2022, and what you can see there is that certainly up until May, we didn't see a downturn in shipping activity. Where we might have started to see a downturn is in June. Now for June, this is just an estimated data point based on the first half of the month, so it's by no means conclusive. And these are all days adjusted numbers by the way. So there's a very small sign that we might possibly have started to see some sort of downturn in freight activity, but we're certainly not seeing yet a wholesale reversal. And we're certainly not seeing a significant move to some doomsday scenario of below pre pandemic levels yet, but clearly, you know, things could change.
Freight Rate Worries
The next slide is just talking about kind of freight rates more generally. The left hand chart is showing you the domestic freight rate for the United States across all modes. And you can see that we have seen a drop off very recently that would imply that is a either a drop in demand or an acceleration in supply. The right hand chart is international container shipping rates. The purple line there is shipping from China to the US West Coast. What we can see there is there was a bit of a drop at the start of the year. But there's been a little bit of a pickup since. And it's worth bearing in mind with all of this, that there's been a variety of disruptions caused to supply chains whether that's lockdowns in Asia or the long established kind of gumming up of the ports. But you know, there are concerns about freight rates going on there. Next slide is are our timeliness indicators, Phil you want to talk a little bit about those?
Global Freight Timeliness Improving, Still High
Phil Levy: Yeah, I'd be happy to. The other thing I was going to note on all of this and we are breezing through a lot of stuff kind of quickly, particularly these, Chris pulls together very nicely in the logistics pressure matrix, you can find all of these indicators on our website, we will also have these charts for you. But you have the logistics pressure matrix, not just for the US, but now also for Europe as well, that we have sort of two separate logistics pressure matrices that are updated weekly, as new information comes in.
So on this one, this is our measure of how long does it take to get stuff, whether you're doing it by ocean on the left or air on the right. And so for ocean, this is from cargo ready when it's cargo ready in Asia, and we show two different trade lanes. There's the far east west bound, which is the the darker that's from Asia to Europe. And then there's the bluish one, which is the Trans Pacific east bound from Asia to North America. What do we see here, we see that overall, it's up, we're nowhere near back to where we were pre pandemic, we see that it has improved quite a bit of late. But that's kind of gotten us back to where we were in the summer or fall of last year.
The other curious thing that I keep a wary eye on is, this is not the first time that we've had a spike and a pullback if you look that's happened rather regularly. And then it's been followed by a new upturn. So I think the next few months are gonna be very interesting that way as we move towards what's traditional peak season, do we do that again? Do we then start moving back up? This is really the full ships part of things, or does this continue going down, which is what it would look like if we're really getting a recovery and a move away from the kind of congestion we've seen to the pandemic. And on the right, I won't say a great deal about it. But this is a similar measure for air where we've also seen an improvement. We're also not quite where we were pre pandemic, but we are perhaps closer than we are on the ocean side. All right, so we the next slide.
OTI Stage 1 Back to Summer 2021 Levels
Oh, because the next slide, I should note, those earlier things you saw tend to be the end of a full journey. And if that's a journey that's taking 100 days, it takes a while, that we're looking at goods that left Asia three and a half months ago, for example. Here, we look at an indexed, an average measure of cargo ready date to when does it leave Asia, which gives us a more timely indicator of this. And now you see an unambiguous improvement over recent months, that has gotten notably better. Again, not quite back to where it was at the onset of the pandemic in the early days, but significantly better than it was. All right, we are essentially out of time. But I'm gonna, let's go through, I want to do a poll.
So I want to ask everyone in a minute or so remaining. And the pool is going to be, you should have it up. What is your biggest concern in the year ahead? Is it consumer demand falling off? Is it rising interest rates? Is it that inflation keeps going up? That will have a resurgence of the pandemic? Or is it that you're gonna have to deal with more supply chain disruptions with ports, shipping warehousing all failing to clear? So, thank you for those of you who have voted, we're going to close with this. I know I apologize, I always say we're gonna get to Q&A, and then we get to talking about lots of these things. I do want to know, while you're filling out this poll, and it looks like the leader at the moment is consumer demand falling off, but inflation is giving it a run for the money as it were. Inflation is surging. No, the, interesting, it's interesting to see that, this is actually your response has been fascinating all these polls because we get a degree of balance in this, which I think, whether you mean it this way or not, we'll take it as validation of her point that, you know, this is a complicated time where you have a lot of indicators pointing in different directions. And we thought the best we could do was to keep you fully informed about this. Let me close with we go forward one slide on this.
Ukraine Crisis: How You Can Help
With just a note that Flexport is organizing, continuing to raise donations to send shipments of relief supplies to refugees from the crisis in Ukraine. We'll have a link in the chat if you'd like to learn more about this. Alright. So with that we are at the end of our time, we want to be respectful of all of your time. We thank you everyone for joining us. Thank you Chris for putting this all out with me. We're going to email out the slides and we'll have a link to this recording tomorrow morning. We'll also drop a short feedback survey into the chat please take a moment to share your thoughts and feedback with the team so we can continue to curate great content for you. Thank you all for joining us and have a great day.
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