The Challenges with Supply Chains
Discussions on the economy these days tend to center on one of three topics: inflation, employment or supply chains. This past week we got some more color on all three topics, with our interpretation being that they are becoming more interrelated. On Wednesday, the Consumer Price Index (CPI) was released showing prices rising 0.4% between August and September, making for an annualized inflation rate of 5.4%. Thursday offered positive evidence on employment, as weekly jobless claims reached a new pandemic low. The market cheered these reports on, as the S&P 500 rebounded +1.8%, finishing the week on a high note and crossing above its 50-day moving average.
This week also began the start of third quarter earnings results, with a small number of companies releasing their reports. Commentary from some company management teams offered insights on labor, pricing and just what might be driving supply chain challenges. These comments hinted that supply chain pressures are tied to labor difficulties, which could lead to future price hikes, and unfortunately are unlikely to be resolved any time soon.
Industrial distributor Fastenal Company provided some interesting narrative around supply chains in their quarterly earnings call. CEO Dan Florness bluntly characterized conditions stating, “product and shipping cost inflation is not just high, its brutally high.” He later added that the cost of renting a shipping container is up 4x what it was a year ago. And that’s if you can get a container. In a number of cases, instead of putting the container on a railcar and hauling from the port to a distribution center, they are having to unload the container onto a truck, at the port, because the container is not available for rent and needs to return to its port of origin.
J.B. Hunt, an intermodal logistics company, added that shipments are also sitting at their customers distribution centers as labor shortages are impacting efficiency across the supply chain. Labor challenges are hitting each piece along the supply chain including rail carriers, truck networks and even more acutely at customer facilities. Backlogs are starting at the ports, as many boats are having to anchor in harbors for 9-10 days before being unloaded. On the other end, trucks and containers sit at customer distribution facilities waiting to be unloaded, thereby tacking on added days to delivery schedules.
Given the increased need to sort and store goods, there is abundant demand for logistics facilities near West Coat ports, such as Long Beach, Los Angeles, Seattle and Tacoma. In fact, we’ve heard of logistics facilities selling for record low capitalization rates (below 3%), as buyers are comfortable paying high prices based on the expectation that outsized lease rates can make these properties economical in the years to come.
What has become clear is that supply chain challenges aren’t an easy fix. Its not just a matter of getting boats through the ports quicker. Having access to more shipping containers that could go on railcars would help with efficiency in unloading containers. Having more labor at the ports, in the rail networks and in the last mile of trucking would all help as well.
Until the labor dynamic improves bottlenecks in supply chains are likely to continue into 2022. The challenge, however, is broader than getting more people into the workforce. For the last several years the trucking industry has been grappling with a shortage of drivers as its workforce has aged. In addition, increased regulation around hours of service has also impacted efficiency. More recently, vaccine mandates and COVID testing imposed by some operators are beginning to worry some that labor issues may only accelerate.
These challenges are almost certainly going to lead toward higher wages and higher prices. This flows back to the inflation statistics we saw this past week. While some of the transitory impacts are starting to fade from inflation data, it’s likely the wave of increasing wages and higher logistics costs will begin to have upward pressure on inflation readings in the months to come.
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The Consumer Price Index (CPI) measures the performance of US inflation (not seasonally adjusted) which is the rate of change of consumer goods prices. It measures of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The data is from Bureau of Labor Statistics. The value of the current month CPI is estimated by the average value of the previous two months CPI. The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.
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