The Covid Factor
In 2021, global supply chains became scarce. As a result, supply chain pricing jumped to all time highs. Carriers and suppliers were only offering 7 day-14-day rate terms. Orders would not depart for 45 days. This would subject the rates to 2-3 potential (and very likely) rate hikes in this period. This volatility had a ripple effect on goods throughout the globe as pricing for materials could not be fixed. It was clear delays at the factory and increases in production pricing would affect pricing at the consumer level. As delays mounted as carrier reliability index plummeted and there was no predictability when products would arrive in the U.S. (or Europe). We will review why Covid highlighted the fact that supply chains are a leading indicator for the US Economy.
Shanghai Containerized Freight Index
Shanghai Containerized Freight Index (SCFI) and the Consumer Price Index (CPI) are two economic indicators that provide insights into different aspects of the global economy. SCFI tracks changes in ocean freight rates for shipping containers from Shanghai to Long Beach. CPI measures the average change over time in the prices paid by consumers for consumer goods and services.
Economic Indicators
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Despite the differences in the nature of these indicators, there is some relationship between them. The relationship between the SCFI and the CPI is through the impact in landed costs via the supply chain costs.
When the SCFI rises, it indicates that the cost of shipping goods has increased. Normally, a 20-40% increase in a container to a west coast distribution center has minimal effect on the actual retail value. However, this cost is an indicator to demand and supply issues.
This can contribute to higher inflation, which is reflected in the CPI. On the other hand, if the SCFI falls, it can lead to lower transportation costs and perhaps lower prices for consumers, which can help keep inflation in check.
Relationship to Economy
Another factor proving supply chains are a leading indicator to the US economy is the broader impact of global trade on the economy. As the SCFI is a measure of the volume of international trade, changes in the index can reflect shifts in global demand and supply for goods and services.
The Baltic Dry Index (BDI), which tracks the cost of shipping dry bulk goods like iron ore and coal, fell to a historic low in 2009, as the supply of vessels exceeded demand. In contrast, during the COVID-19 pandemic, the demand for certain goods like PPE, medical supplies, and home office equipment surged due to lockdowns, leading to a shortage of shipping containers and a sharp increase in shipping rates.
If high shipping prices lead to high consumer prices then the inverse is true and low shipping / supply costs will lead to lower costs for consumers. There is a 9 to 12 month delay for supply chain costs to work through the distribution networks to the consumer.
Supply chain costs began dropping in June 2022 and as of this writing are 90% lower than the all-time highs. This puts a normalization of consumer pricing between June 2023 to June 2024. Or, for investors, buying.
Record Highs
The SCFI, reached record highs in 2020 and an all-time high in December of 2021 at $5046, as container shortages led to increased costs for shippers and higher prices for consumers throughout the supply chain.
During the 2009 recession, many shippers reduced capacity by retiring older vessels, leading to fewer options for transporting goods. At this time, the supply chain, as a leading indicator to the economy proved that a recession was in place because pricing dipped to all time lows. During the COVID-19 pandemic, many ports experienced disruptions due to reduced staffing and social distancing measures, leading to delays in unloading cargo and a backlog of ships waiting to dock.
In 2021, travel and other restrictions to contain the spread of the virus led to reduced availability of air cargo, which further strained supply chains. In terms of recession concerns, the 2009 recession was characterized by a decline in demand for goods and services, leading to a contraction of the global economy.
COVID-19 pandemic led to massive government stimulus programs and concerns about inflation have increased due to supply chain disruptions, increased shipping costs, and shortages of raw materials, leading to potential risks for future economic growth.
High Prices and High Demand
Regardless of the increases in supply chain costs, demand for import containers rose every month from March 2021 through June 2022.
In this period, consumer goods remained flat. Flat consumer prices combined with additional access to cash (money printing) added to the demand for more. Customers were consistently questioning how much higher can pricing go as the economy continued upward.
Pricing is a reflection of the demand and as the demand for containers rises, so will the price. However, once the demand ceases, carriers will be forced to reduce rates. See the below chart from freightwaves highlighting the demand, mirroring the price above. With demand rising since March 2021 and remaining high….until June 2022. But then what happens? Why?
In Q4 2021, I had the opportunity to sit in on an economist speaking about this very phenomenon. He went into granular detail about the US Economic state at the time and moving forward. The elevated shipping prices we were seeing had not made their way all the way through the supply chain yet. These elevated prices would not be felt by the consumer until earliest Q1.
Consumers Feel the Pain
These elevated supply chain prices have resulted in a wave of inflationary concerns across the nation; yet, the economy reportedly is doing well. . The Ukraine Invasion is also having an effect on food goods and some increase on fuel.
Consumers see the increase in total supply chain costs from the past 2 years and it is drastically reducing demand. Perhaps it is due to the tripling of the fuel + grain increases + transport increases that have caused this sudden drop.
The overall decrease in imports is 36% from all countries. Already, ocean prices have begun to fall and the “premium” rates. As of February 2023, shipping rates have decreased 90% in some lanes with no delays at Asia ports.
Is this a sign that prices will come down as well? Already, factories are reporting decreased lead time which is a sign that US Purchase orders are decreasing and/or cancelling. Inventory levels are fully stocked here in the US already. If the transportation increases were not felt for 6-9 months, perhaps consumers will begin to see these “REDUCED” prices by Q1-Q2 2023?
The X Factor in this scenario is the Ukraine conflict and the effect it is having and will continue to have on fuel and food products. However, it does seem logical that at least 1 factor causing inflation is on a downward trend.
Update 2023