Six years after the official end of the Great Recession in June 2009, U.S. manufacturers, wholesalers, and retailers continue to play it safe and act conservatively with respect to their inventory holdings. Many companies, though, have been caught off guard by several major developments in the U.S. and global macroeconomic environment during the past 12 months. These include the following:
World oil and commodity prices have plunged. In June of 2014, Brent crude, a benchmark for world oil prices, stood at around US $112/barrel. By the end of January of this year, it had plunged to a low of $48.40/barrel. As of June 2015, the Brent price had recovered by approximately $15/barrel from the end-of-January reading, but it still remains around $48/barrel lower than its June 2014 level. World commodity prices have also fallen sharply over the past year. The IHS Materials Price Index (MPI)—an aggregation of exchanged and non-exchanged traded commodity prices computed by IHS—plunged by approximately 40 percent between the last week of June 2014 and early July of this year (see Figure 1).
For most economies, lower oil and commodity prices typically provide a net benefit, but for energy-producing countries whose economies heavily depend on oil revenues, such as Saudi Arabia or Russia, they have a strong negative effect. In the United States, lower oil prices are a good thing or a bad thing, depending on whom you ask—or where you live. For consumers, lower oil prices are good: They translate to lower gasoline prices at the pump, which frees up cash in household budgets and helps to boost consumer spending. Lower energy prices also allow companies to reduce their transportation costs, creating savings that can increase their margins or be passed along to consumers. But falling oil prices are behind a pullback in energy exploration and investment in several parts of the United States, including West Texas, North Dakota, Oklahoma, New Mexico, Louisiana, and Alaska. Moreover, spending on equipment and structures like drilling rigs by businesses in the energy and mining industries has been hit hard as drilling activity has diminished. Texas as a whole is likely to fare relatively well thanks to its diversified economic structure, but North Dakota and Oklahoma are seeing a major impact, since their local economies depend to a significant degree on energy production.
The U.S. dollar continues to appreciate in value. In the past 12 months the U.S. dollar has appreciated considerably compared to most major currencies. At the beginning of August 2014, the value of a euro was in the neighborhood of US $1.34. In mid-March of this year, the euro exchange rate hit a 12-year low of $1.05. It has recovered very slightly, to approximately $1.09 as of the third week of July.
A stronger dollar helps boost imports, as imported products become relatively cheaper, and it lowers consumer and producer price inflation by making imported consumer products and intermediate inputs less expensive. However, it places corresponding downward pressure on exports of manufactured goods.
Several emerging markets are slowing down—and some are in deep recession. The Russian and Brazilian economies continue to contract and are still in recession. Russia's real gross domestic product (GDP) was down 0.6 percent year-over-year in the first quarter of 2015. We at IHS expect a total of four quarters of contraction, with Russia pulling out of its recession by the fourth quarter of this year. One challenge for the country is that over 50 percent of the government's revenue is energy-based, so lower energy prices have a strong negative effect on the economy. Another is that the sanctions imposed by the United States and the European Union due to Russia's involvement in the Ukrainian and Crimean conflicts are unlikely to be lifted before 2016. These sanctions are restraining credit availability—and therefore are elevating interest rates—by isolating Russia from international capital markets.
Brazil's real GDP fell 0.2 percent quarter-on-quarter in Q1, and we expect the second and third quarters to be in negative territory as well. Brazil's troubled economic situation—we anticipate a 1.4 percent contraction this year and tepid 0.6 percent growth in 2016—could also take a turn for the worse. Rising inflation is forcing the country's central bank to raise interest rates at a time when the economy is already contracting.
Turbulence roils China's stock market, and a Greek tragedy unfolds. For anyone in tune with international economic developments, the headlines in June and July of this year have been extraordinary. Greece came very close to exiting the eurozone, and China suffered a major stock market correction.
Fortunately, the "contagion" effect of these events on other economies has been mild, as evidenced by the limited volatility in global financial markets and foreign-exchange rates. One reason is that banks in the rest of the world have dramatically reduced their exposure to Greek debt, from about €247 billion in mid-2012 to €34 billion this year. In addition, European authorities have set up emergency bailout funds to insulate the rest of Europe from the fallout of the ongoing Greek crisis. Another is that the Chinese equity bubble was largely financed with local money, so foreign banks have limited exposure. Moreover, swift action by China's government seems to have stopped the stock market rout—at least temporarily.
Consumer spending gives the U.S. a boost
Mixed or tepid growth in some emerging markets, uncertainty around the Greek debt crisis, and a stronger dollar all have placed significant downward pressure on U.S. exports. Real exports of goods declined 3 percent in the first quarter of 2015. In addition, the labor-related West Coast port disruptions in the last quarter of 2014 and the early part of this year put a damper on both import and export trade. Many retailers had a difficult time restocking, and manufacturers' and wholesalers' inventories were running low in the first two quarters of the year.
After stalling in the early part of 2015, the U.S. economy is expected to resume its relatively better expansion, mostly on the backs of consumer spending and a sustained housing-market recovery. IHS expects consumer spending patterns to be more balanced in the 2015-2017 period than they were from 2010 through 2014, with stronger growth in services and nondurable goods. The robust growth in auto sales that has been an important driver of consumer spending over the past few years, caused by a release of pent-up demand, is likely to moderate. Light-vehicle sales climbed at double-digit rates from 2010 through 2012, but sales growth slowed to 7.6 percent in 2013 and declined further, to 5.7 percent, in 2014. Auto unit sales are expected to increase over the next three years, but at a significantly slower pace. Light-vehicle unit sales are expected to rise 3.6 percent in 2015 and around 2.0 percent in 2016 and 2017.
Retailers have been relatively cautious when it comes to inventory building because of tight margins, fierce competition, and price discounting. However, since consumer spending and the housing market will be the main drivers of economic growth for the next couple of years, IHS expects retail inventory growth to outpace wholesale and manufacturing inventories by a considerable margin in the period 2015-2017 (see Figure 2). We are currently forecasting increases in real retail inventories of 3.4 percent in 2015, 4.9 percent in 2016, and 4.1 percent in 2017.
Manufacturing inventories are expected to be considerably weaker, with exports handicapped by weak global markets and the strong dollar. We expect real manufacturing inventories to increase 0.9 percent in 2015, and then 1.7 percent in 2016 and 1.8 percent in 2017.
Wholesale inventories have seen a disproportionate buildup in 2014 and the first half of 2015, so their growth rate is expected to slow to 2.1 percent in 2016 and 1.5 percent in 2017. Like manufacturing, wholesale inventories are exposed to the weakness of export markets, which is mitigating growth; however, wholesalers also benefit from strength in sales and inventories on the retail side.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”