CONSUMER SPENDING + SUPPLY CHAIN
In Q2 of 2020 we saw US GDP contract by 31.7%. This contraction was the ending to the longest economic expansion on record, followed by the worst quarterly downturn ever. In response, experts are predicting some 30.8% annualized growth setting yet another record. Driving the anticipated bounce back is major spending from the “work-from-home” consumer segment. This newly created segment of consumers is estimated to contribute 2/3rds of all consumer purchases, while only accounting for 40% of the total consumer market.
With a huge uptick in consumption of durable goods as compared previously to services, inventory-to-sales ratios are at all time lows. The span of companies who have in recent times adopted JIT (just-in-time) supply chain practices are now rapidly shifting to R&R (resiliency & redundancy). Why? Supply Chain Managers are facing the fact that consumer spending has been unpredictable and quite strong compared to expectations. They must have safety stock, and this may be the way of the future as so many companies are now looking at methods to reduce risk of inventory shortages and alleviate potential disruptions due to supply chain challenges. McKinsey Global Institute reports that 93% of companies surveyed have enacted R&R supply chain models based on market factors that demand adjustments.
Freight markets have been over capacity now for months. Due to the above factors, capacity in all facets of transport have been surpassed by demand continuously. Here’s a glance at domestic and international indicators as of August:
- Ocean shipping rates were at all-time highs; Average rates to Los Angeles were $3900/FEU, compared to $1300/FEU one year prior
- Truckload spot rates were up 35% YTD, over $2.77/mi
- ISM Manufacturing was at a 21-month high of 56.2
- Orders for Transportation equipment was up 35.5% ($74.7 b for the month)
- Durable goods orders rose 11.2%, up for three months straight
Overall, Supply Chains will see long-lasting changes as a result of what the US and world economies have experienced in the course of 2020. Changes to stocking and inventory processes, near-shoring, sourcing of raw materials changes and an overall aversion to heightened risk in supply chains may deliver some lasting impact on all of us. Domestic truck rates will likely remain above average for some time, as will international freight costs. Warehousing demand and pricing is likely to be in much higher demand as US Companies beef up available inventories. GDP expansion will further assist in adding more demand to all markets compared to what the existing infrastructure can support short-term. Without question, there is great variability to the expectations we all should have for the next 12-24 months. One thing is sure, averages and trends we have grown accustom to are not likely to be the guiding light as the world slowly moves back to ‘normal’.