The Economic Recovery and Supply Chain Issues - Randy Shaffer
I have written before that this economic recovery will not look like previous recoveries because it was not caused by normal economic issues but by the pandemic and the Government response to it, (shutting down much of the economy). As the recovery continues the strengths of the pre-pandemic economy are still evident and ready to resume but also some of the built-in flaws in our economy have become evident.
The supply chain has showed the weakness of manufacturing and warehousing built on just-in-time deliveries. The idea that we can stock parts and components at minimum levels and maintain output has worked as long as the economy does not have rapid growth or decline. In the current situation we have had both and the overall economy has recovered faster than the supply chain can handle, and the basics of supply and demand are being felt.
A few statistics here:
- The cost to get a container from Asia to the U.S. has gone from about $2,500 Pre pandemic to a current price of over $20,000.
- Ten companies now control 80% of container shipping and they are packing more containers onto each ship. An average of around 4,000 containers pre pandemic to 7,000 today. Our ports are simply not prepared for the increase, even the same number of ships represents a 75% increase in containers.
- Transportation of containers out of the ports is also contributing to the backlog. If we cannot get containers moved out of the ports, we cannot unload more. Unemployment has had a role here as a persistent driver shortage has slowed distribution. As of September, the Government ended the Pandemic Unemployment Assistance payments and it is assumed that ending that program will bring people back into the work force, including drivers.
- The port of Los Angeles/Long Beach has the largest backlog of containers with 50+ ships and an estimated 500,000 containers to be distributed. Savannah has 80,000 and other ports are also behind but not at that level. The port manager of Los Angeles/Long Beach says he expects the port to return to normal levels during the 2nd quarter of 2022. Part of that optimistic outlook is based on the number of containers loaded with retail for the U.S. holiday season.
- On the equipment side of the industry, (both construction and agriculture) that is only part of the issue. Once the parts and components arrive at the manufacturer some must be re-shipped to dealerships to support the equipment already in the field, a fleet that is ageing and needs more support. While the majority go to produce the finished product for distribution to dealerships which will get that product into the hands of end users. Still issues of drivers and shipping space to deal with.
Some things we can look for in response to these issues are more manufacturers moving production to the U.S. and possible changes to the stocking levels of parts and components. Also, some companies will elect to charter their own ships, four companies have already taken that step or announced that intention.
My outlook is that we can expect to get an increase in machine deliveries during the 3rd and 4th quarters of 2022 but not be current with total placed orders until sometime during 2023. I am forecasting unit deliveries for 2022 to be about 8.5% above actual economic demand to account for stocking orders and restocking of rental fleets that were reduced during the economic contraction.
A subject here that ties to the supply issues, inflation. The U.S. Government and the Federal Reserve are telling us that the current level of inflation is transitory. Maybe core inflation is but they do not include food and energy in that number. Lumber prices have come down but are still 100% higher than a year ago, steel is approaching all-time highs, and oil is above $80 and increasing. The consumer price index is near 5% and many items included in that number do not look transitory. Heating bills will undoubtedly be higher this year with natural gas, coal, and electricity all forecast higher. Commodity prices on the agriculture side of the economy are being driven higher by increases in input prices, (fuel, fertilizer, rail transportation). Almost everything we consume is affected by the cost of energy and transportation and I see little relief in those categories. The Federal reserve has also indicated they plan no interest rate increases until 2023, but with the current level of inflation and the speed of the economic recovery, I doubt they will be able to wait that long.
Randy is the founder of CTR Forecast in 1993, a NAXSA member. They provide custom sales and economic forecasting to construction machinery dealers and manufacturers.
