James Bohnaker is an associate director with IHS Markit, headquartered in London. IHS Markit provides information, analytics, and solutions to major industries and markets worldwide, including more than 50,000 business and government customers in 140 countries.
The global financial crisis triggered by the collapse of Lehman Brothers in September 2008 ushered in a new era of monetary policy making. Central banks across the globe—such as the U.S. Federal Reserve and the Bank of England—slashed interest rates and invented new ways to inject stimulus into their economies. Although the scars of the crisis are still evident, the global economy is far healthier now than it was ten years ago, thanks in large part to actions taken by central bankers. The recession would have been far worse without their aggressive and harmonized monetary response.
Now ten years removed from entering crisis management mode, policymakers must figure out if (and how) they wish to undo these extreme measures to mitigate some of their unwanted side effects. Doing this would have the benefit of preventing inflation, impeding financial bubbles from developing, and making it easier for central banks to soften the damage in future crises. The trade-off is that it makes it costlier to finance business investments and consumer purchases, which has a negative impact on economic growth and international trade.
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The Federal Reserve is leading major central banks in raising interest ratesEnlarge this image
Essentially, the question for policymakers boils down to whether they can remove stimulus without significantly reducing demand for goods and services. The answer to that question will vary greatly for different economies, given the uneven nature of their recoveries and an assortment of risks that must be taken into consideration. Nevertheless, those decisions will have a profound influence on global trade flows over the next few years. Aggressive removal of stimulus could ground trade to a halt, but maintaining low interest rates for too long could stir up even bigger problems down the road.
Fed makes the first move
The U.S. recovery has outpaced those of other advanced economies, and so it is further along in its efforts to normalize monetary policy. From 2015 to 2017, the Federal Reserve (Fed) raised interest rates in irregular intervals and only by small amounts. However, in 2018 as U.S. economic growth accelerated, the Fed began raising interest rates more steadily and at more predictable intervals. (See Figure 1.) Heading into 2019, the Fed intends to raise interest rates further. Interest rates are now more than halfway back to what the Fed considers neutral—a rate which is neither restrictive nor accommodative of economic growth. The Fed has also backed off its commitment to keep rates low for an extended period and has begun winding down its balance sheet assets, selling off some of the assets and bonds that it bought in the recession. Both of these actions will contribute to tighter financial conditions.
What the Fed's path should be going forward is more difficult to handicap, given questions about how much further the economic expansion has room to run. The Trump administration's fiscal stimulus measures—tax cuts and additional government spending—are designed to have their peak impact on economic growth in 2018. By late next year, these measures will no longer be supporting growth, andthe U.S. economy will be more vulnerable to higher interest rates.
This may create a policy "fork in the road," at which point the Fed must decide whether to prioritize lengthening the expansion or fending off inflation. Inflation is currently relatively muted, but labor market tightness and tariff-induced price pressures should have a larger impact next year. On the other hand, the recent surge in financial volatility—a de-facto tightening of financial conditions—threatens to slow global growth (and therefore U.S. growth) on its own if it persists in 2019. This balancing act may create some policy uncertainty with spillover effects into the rest of the global economy.
Brexit uncertainty remains elevated
The Bank of England (BOE) followed the Fed's lead in the aftermath of the global recession by slashing interest rates, engaging in quantitative easing (or buying large amounts of government bonds and other financial assets to stimulate the economy), and introducing forward guidance (or communications about what their future monetary policy will be) to keep rates low for an extended period. In early 2016, it looked as if the BOE was poised to follow the Fed's lead on raising interest rates, but that prospect became increasingly uncertain after the 2016 referendum in which the United Kingdom voted to separate from the European Union (EU). The uncertainty caused by Brexit prompted the BOE to temporarily lower rates instead of increasing them. However, since late 2016, the U.K. economy has lowered its unemployment rate and managed enough growth to warrant slightly higher interest rates.
In recent months, however, the U.K. economy has taken a turn for the worse, and there remains a heightened amount of uncertainty about ongoing Brexit negotiations. The possibility that the U.K. and the EU might fail to strike a deal that would smooth the U.K.'s departure presents daunting downside risks. Firms would face new trade tariffs, potentially severe cross-border delays, and disrupted domestic supply chains, prompting the delay or cancellation of investment projects. In addition, the household economy would be hit via substantial losses in real income and wealth. This uncertainty creates a headache for the BOE, which cannot reasonably commit to raising interest rates until there is resolution regarding post-Brexit relations. As such, monetary policy will likely be on hold in the U.K. until the Brexit deadline in late March.
Baby steps for Europe and Japan
The European Central Bank (ECB) and the Bank of Japan (BOJ) took even more extreme measures to combat their sluggish economic recovery; they have been operating with negative short-term interest rates for several years (meaning that depositors must pay to keep their money in the bank). Now, each finds itself in a similar situation to the BOE—ready to begin removing accommodation but unable to do so with confidence, given the numerous economic and political risks.
Marking a significant step toward normalizing monetary policy, the ECB announced in June its intention to cease new asset purchases at the end of 2018. While the bank is likely to follow through with this commitment, there is a high degree of uncertainty as to when (or if) interest rates will rise. The bank has committed to keeping rates low until at least late 2019. Even then, the economy and risk profile would have to improve for policymakers to feel comfortable tightening monetary policy in a gradual manner. Economic expansion—which ECB chief Mario Draghi described one year ago as having "unabated growth momentum"—has lost steam recently, coinciding with rising tensions over the Italian budget standoff and deteriorating financial markets conditions, in addition to heightened uncertainty over a U.K. exit.
The ECB is in the unique situation of having to manage the outlooks of member countries with very different vulnerabilities. Germany's heavy reliance on exports, for example, makes it somewhat more exposed to shocks that erode global trade flows (such as protectionism), while a country like Italy is more susceptible to exchange rate swings and financial market gyrations due to its precarious budget situation. The types of threats that emerge over the next year will have varying impacts on euro countries, which makes it difficult to tease out a clear outlook for monetary policy by the ECB. The most likely scenario is one in which the ECB errs on the side of being cautious, opting to keep policy accommodative for longer given the numerous risks.
The BOJ is even further away from normalizing policy. The bank is expected to maintain yield-curve control for Japanese government bonds, which involves keeping its 10-year government bond yield at zero to raise the profitability of banks. It is also expected to keep its negative interest rate policy with aggressive monetary easing (or boosting of the supply of money) to achieve its 2-percent inflation target. However, modest inflationary expectations and delays in structural reforms will hinder the attainment of that target. It will be years until BOJ raises interest rates above zero, as the risks of slow economic growth are greater than the threat of inflation for Japan at the moment
China balancing stability and growth
China's economy has seen a similar slowdown in 2018 as it endures some growing pains during the transition toward a more service-based economy. The previously announced hike in tariff duties on US$200 billion in exports to the U.S. has been delayed for at least 90 days, a good sign that trade talks are becoming less hostile. Still, uncertainty about trade policy has led to dampened export orders for some Chinese goods. Additionally, tighter government financial supervision and regulation has slowed fixed investment, notably infrastructure and real estate investment. As growth slows, the government is shifting its policy balance toward growth support. In addition to fiscal measures taken by Beijing—including personal income tax cuts and export tax rebates on selected products—the People's Bank of China (PBOC) has chipped in by reducing banks' reserve requirement ratio. PBOC is likely to maintain a balanced or slightly accommodative stance in the near term so long as the yuan does not weaken significantly against other currencies. Although the tariff rate increase has been delayed, the risk of trade war escalation will be a key determinant in PBOC policy, and those developments are very much uncertain at this point.
Emerging markets fighting off currency depreciation
Rising interest rates in the United States have led to a much stronger U.S. dollar, which has put intense downward pressure on exchange rates for emerging-market currencies. Some of the emerging-market woes are also homemade, including poor governance, lack of structural reforms, increased political uncertainty, and a piling-up of debt, both in foreign and domestic currencies. These problems will get in the way of strong autonomous rebounds in emerging markets and developing countries (which account for about 40 percent of global gross domestic product). Emerging market central bankers will have a tough and unpredictable road ahead as they look to stem capital flowing out of their economies and currency depreciation, while also supporting growth.
Multiple forks in the road
The various challenges facing central bankers make for a highly uncertain policy landscape as the global economy enters the latter stages of expansion. Economic growth is due to slow, so policymakers must be careful not to remove accommodation too abruptly and cause a downturn. At the same time, there is good reason to believe there are benefits to be gained from returning to conventional monetary policies. Further muddying the path toward normalized policy is the elevated nature of global geopolitical risks that have developed recently. This raises the possibility that policy may unexpectedly deviate from its expected path, which could make for some disruptive financial market volatility over the next few years. This alone should not cause a big shock to the real economy, but it elevates the importance of policy choices that are made in response. As such, monetary policy will play a crucial role in determining the relative performance of global economies, and in turn, the manner in which the global supply chain adapts to shifts in demand.
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.
The warm waters of the Gulf of Mexico are brewing up another massive storm this week that is on track to smash into the western coast of Florida by Wednesday morning, bringing a consecutive round of storm surge and damaging winds to the storm-weary state.
Before reaching the U.S., Hurricane Milton will rake the northern coast of Mexico’s Yucatan Peninsula with dangerous weather. But hurricane watches are already in effect for parts of Florida, which could see heavy rainfall, flash and urban flooding, and moderate to major river floods, according to forecasts from the National Oceanic and Atmospheric Administration (NOAA).
As it revs its massive engines with fuel from the historically warm Gulf of Mexico, Hurricane Milton could possibly hit Tampa as a Category 5 storm, according to the FEWSION Project at Northern Arizona University, which tracks supply chains throughout the country.
With that much power, Milton could shut down the port and seriously disrupt the fuel supply into western and central Florida, which could then hinder recovery efforts. That’s because fuel supplies for much of Florida, especially central Florida, arrive from Texas and Louisiana through the Port of Tampa. That means that anyone who depends on generators or fuel for critical functions should plan for an extended period without access to fuel. And recovery crews and logisticians should consider bringing their own fuel when responding to the storm, FEWSION said.
One of those disaster recovery efforts will be led by nonprofit group the American Logistics Aid Network (ALAN), which is already mobilizing its forces for Hurricane Milton, even as it devotes other energy to the Hurricane Helene response. “In an ideal world we’d have plenty of time to focus all of our efforts on Hurricane Helene clean-up and recovery,” Kathy Fulton, ALAN’s Executive Director, said in a release. “But in the real world, major hurricanes don’t always wait for their turn. As a result, we are officially activating for Hurricane Milton.”
In the meantime, many weary residents of the region are thinking of moving to another part of the country instead of getting hit by vicious storms several times a year. Nearly one-third (32%) of U.S. residents aged 18-34 say they’re reconsidering where they want to move in the future after seeing or hearing about the damage caused by Hurricane Helene, according to a survey commissioned by real estate brokerage Redfin.
“Scores of Americans flocked to the Sun Belt during the pandemic because remote work allowed them to take advantage of the region’s relatively low cost of living. Some thought Appalachia was insulated from hurricane risk, not realizing that the area is prone to flooding and that hurricanes can sometimes cause flash flooding far away from the ocean,” Redfin Chief Economist Daryl Fairweather said in a release. “Americans are beginning to realize that nowhere is truly immune to the impacts of climate change, and we’re starting to see that impact where people want to live—even people who haven’t experienced a catastrophic weather event firsthand.”
The report is based on a commissioned survey conducted by Ipsos on Oct. 2-3, fielded to 1,005 U.S. adults. After making landfall in Florida in late September, Hurricane Helene wreaked havoc across Appalachia, becoming the deadliest storm to hit mainland America in almost two decades. In North Carolina, the death toll has surpassed 100 and the city of Asheville has been devastated.
Shippers and carriers at ports along the East and Gulf coasts today are working through a backlog of stranded containers stuck on ships at sea, now that dockworkers and port operators have agreed to a tentative deal that ends the dockworkers strike.
In the meantime, U.S. importers and exporters face a mountain of shipping boxes that are now several days behind schedule. By the latest estimate from Everstream Analytics, the number of cargo boxes on ships floating outside affected ports has slightly decreased by 20,000 twenty foot equivalent units (TEUs), dropping to 386,000 from its highpoint of 406,000 yesterday.
To chip away at the problem, some facilities like the Port of Charleston have announced extended daily gate hours to give shippers and carriers more time each day to shuffle through the backlog. And Georgia Ports Authority likewise announced plans to stay open on Saturday and Sunday, saying, “We will be offering weekend gates to help restore your supply chain fluidity.”
But they face a lot of work; the number of container ships waiting outside of U.S. Gulf and East Coast ports on Friday morning had decreased overnight to 54, down from a Thursday peak of 59. Overall, with each day of strike roughly needing about one week to clear the backlog, the 3-day all-out strike will likely take minimum three weeks to return to normal operations at U.S. ports, Everstream said.
Economic activity in the logistics industry expanded for the 10th straight month in September, reaching its highest reading in two years, according to the latest Logistics Managers’ Index (LMI) report, released this week.
The LMI registered 58.6, up more than two points from August’s reading and its highest level since September 2022.
The LMI is a monthly measure of business activity across warehousing and transportation markets. A reading above 50 indicates expansion, and a reading below 50 indicates contraction.
The September data is proof the industry is “back on solid footing” according to the LMI researchers, who pointed to expanding inventory levels driven by a long-expected restocking among retailers gearing up for peak-season demand. That shift is also reflected in higher rates of both warehousing and transportation prices among retailers and other downstream firms—a signal that “retail supply chains are whirring back into motion” for peak.
“The fact that peak season is happening at all should be a bit of a relief for the logistics industry—and economy as a whole—since we have not really seen a traditional seasonal peak since 2021,” the researchers wrote. “… or possibly even 2019, if you don’t consider 2020 or 2021 to be ‘normal.’”
The East Coast dock worker strike earlier this week threatened to complicate that progress, according to LMI researcher Zac Rogers, associate professor of supply chain management at Colorado State University. Those fears were eased Thursday following a tentative agreement between the union and port operators that would put workers at dozens of ports back on the job Friday.
“We will have normal peak season demand—our first normal seasonality year in the 2020s,” Rogers said in a separate interview, noting that the port of New York and New Jersey had its busiest month on record this past July. “Inventories are moving now, downstream. That, to me, is an encouraging sign.”
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).