The conventional wisdom was that with more Americans vaccinated and the economy reopened, the explosion in goods-buying during the COVID-19 pandemic would moderate to at best a muffled roar. Yet the roar appears to remain as full-throated as it was in the summer of 2020, and there’s no sign from data or anecdotes that it will ease off any time soon.
A slowdown in goods-buying was “what we are expecting, but we haven’t seen it yet,” said Griff Lynch, executive director of the Georgia Ports Authority (GPA), which runs the container port of Savannah, the nation’s fourth-largest, and the bulk, breakbulk and roll-on, roll-off port of Brunswick, among other assets.
On Monday, GPA will report record box volumes for its 2021 fiscal year, which ended on June 30. Lynch said there is no indication from throughput data and conversations with retailers that use the port that a slowdown in goods-ordering is on the horizon.
Lee Klaskow, senior analyst-transport and logistics at Bloomberg Intelligence, echoed those comments. “We have not seen any moderation,” Klaskow said. The exceptions, he said, are likely to be found with products such as beer, wine and spirits, where demand today is less than it was during the summer of 2020 when consumers confronted the stressful trifecta of COVID-19, racial unrest, and a contentious general election season.
K.C. Conway, chief economist for the CCIM Institute, a commercial real estate education group, said he doesn’t see consumer demand easing until late 2021 when stimulus spending runs its course and rent and mortgage forbearance programs end. “When one in four American households are either in rent or mortgage forbearance, a lot of consumption is (being) bolstered by not paying rent or a mortgage,” Conway said.
Consumer behavior is always the hub around which revolves the spokes of supply chain activity. But never more so than today. Businesses continue to struggle with backlogs and stockouts. Inventory levels remain at or near record lows. Transportation networks, deluged with demand that neither they nor their shipper customers expected, have been forced to take unprecedented measures such as shutting down core eastbound intermodal lanes to catch up with volume surges. Freight rates, no matter the mode, continue to escalate with no end in sight. Another holiday shopping and shipping season is just four months away.
If shippers, third parties and carriers living for nearly 18 months with overstretched supply chains were hoping for some relief from consumers who have had their fill of stuff, they haven’t gotten it. “Shippers are in a tough environment,” said Phil Levy, chief economist for Flexport, a digital freight forwarder based in San Francisco. Telling them that the consumer isn’t easing off on goods purchases is “not what they wanted to hear.”
Monthly data from Flexport supports Levy’s contention. From January 2016 to February 2020, the ratio of personal expenditures on services and goods was remarkably consistent. About 68% to 70% of spending went to services, and 30% to 32% to goods. The shift in the ratio began, not surprisingly, in the early spring of 2020 as lockdowns, for many, made goods-buying the only outlet for their dollars. The ratio hit 33.8% during the summer of 2020 and dipped toward the end of the year. It then jumped, much to Flexport’s surprise, to 35.3% in March 2021, a time when it was thought the country had begun to turn the corner in its fight against the pandemic.
Levy said he expects the goods component of the ratio to settle for now at about 34%, a level similar to what was reported in the summer of 2020. If the ratio normalizes there, that indicates goods-buying will remain elevated longer than many surmise, Levy said.
Levy attributed the current trends to a sea-change in consumer behavior triggered by COVID-19’s extended duration. The longer a behavioral change lasts, the more embedded it becomes even after the original motivation for the change — in the case of COVID, protecting one’s health — has disappeared, Levy said. By contrast, events like natural disasters have relatively short shelf lives, so it is easy for consumers who changed their behavior to revert to their original habits, he said.
Levy cautioned that the data, which comes from the Commerce Department’s Bureau of Economic Analysis and is integrated with the company’s analytics, has some caveats. For one, the raw numbers are not perfect. The government’s data comes with a two-month time lag. In addition, Flexport’s own projections extend out no more than two months. Still, the numbers have proved as accurate in mirroring real-world activity as such datasets can be, he said.
Cox of FreightWaves takes a different view, with a string or two attached. Citing consumer spending data from Bank of America (NYSE:BAC), Cox said the reversion from elevated goods demand to a more normal goods to services ratio is “well underway,” with strong services data posted over the past three months. Still, consumers with strong balance sheets, aided by government fiscal stimulus, continue to prop up goods-buying, he said.
The recent reversion has “not been a direct swap of goods spending for services, but rather a reversion from at-home spending to anywhere-but-home spending,” Cox said. Consumers are spending more on travel, dining out and entertainment, as well as more on apparel, accessories, and other health and beauty goods and services, he said.
For exhausted shippers and carriers, the reality is that even if the American consumer returns to normal purchasing patterns, retailer demand will remain strong, supply chain taut and rates high. Conway said the country could experience another 18 months to two years of dislocations as rock-bottom inventories get replenished. This is due to the pre-pandemic environment that was greatly amplified by the pandemic itself, he said.
FreightWaves’ Outbound Tender Rejection Index (OTRI), which measures carriers’ willingness to accept loads tendered by shippers under contract terms, remains elevated, though down since April, Cox said. This indicates a decent percentage of loads are still not being accepted, he said. Meanwhile, the volume of electronic tenders, measured by FreightWaves’ Outbound Tender Volume Index (OTVI) has been flat to up for the past several weeks, according to Cox.
“More accepted tenders are (now) flowing through the system than at any point last year, but there simply hasn’t been enough capacity added to keep up,” he said.
Under current conditions, any rate relief for shippers will be fleeting, Cox predicted. The typical pre-holiday lull–if one occurs–will be offset by what is expected to be a very strong back-to-school season, he said. Overhanging all of this are the depleted inventory levels that retailers will need to replenish regardless of what consumers do, he said.
A supply chain that thrives on predictability took a massive blow from the pandemic, according to Conway. The country was heavily reliant on the just-in-time inventory-management model that discourages the holding of safety stock, according to Conway. The past 17 months have provided managers with a “real-world event of measurable impact” that proves the model no longer works and that its days are numbered, he said.
Inventories were further stretched by President Donald Trump’s August 2019 decision to begin imposing tariffs on Chinese imports. The moves caused U.S. companies to draw down existing inventory rather than deal with the uncertainties and higher costs of ordering large quantities from abroad, Conway said.
The pandemic also exposed how interdependent the world’s major trading partners are on each other, and how disruptive an event of such magnitude can be, Conway said. The emergence of the highly contagious Delta variant, and its impact on producing nations with low vaccination levels, is just now being factored into supply chain decisions, he said.
Conway lauded the performance of the nation’s transport infrastructure, saying ports, railroads and truckers, pivoting overnight amid an unforeseen global crisis, have largely held their own. The problem is, and will continue to be, at the front end of the supply chain, he said.
