This year is shaping up to be one of continued disruption. Now war and the economy are disrupting supply chains. Volatility and uncertainty continue from 2021, but at an increased rate.
While there’s little you can do about the war, you have some tools to help you mitigate economic impacts. Therefore, now is the time for you to shift your focus to the economy and how to mitigate its impacts.
If you do that, you can ease or avoid the relentless, disruptive effects on your supply chain.
Today’s economy, wracked by war, is further complicating the New Normal. Recall, the New Normal required supply chains to become agile, speedy, and resilient.
KEY ECONOMIC INDICATORS. Macroeconomic indicators we’ll explore include the Gross Domestic Product (GDP), Consumer Price Index (CPI), the Producer Price Index (PPI), and Unemployment. Next, we’ll review economic indicators that comprise the Logistics Manager’s Index.
We’ll start with a definition of each indicator. Then we’ll follow that with the current status and how that affects your business. Without further ado, let’s start with GDP.
GDP: The Bureau of Economic Analysis defines GDP as: “… the value of the final goods and services produced in the United States (without double counting the intermediate goods and services used up to produce them). Changes in GDP are the most popular indicator of the nation’s overall economic health.”
This macro indicator gets reported quarterly. As of Q4, 2021 GDP stood at 7.0%. That reflected an increase from the prior quarter’ data that showed GDP at 2.3%. The release of the 4th Quarter’s GDP data will occur on March 30, 2022, for industry and corporate profits. The government will release consumer-related GDP data on March 31, 2022, that includes personal income and outlays.
Current data suggest the economy is heating up. IT suggests a strong economy despite headwinds because of the war and inflation. That means the logistics industry can expect an uptick in business activity leading up to the May contracting season. Looking ahead, that will likely translate into increased rates and increased capacity constraints.
CPI: The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
- The U.S. Bureau of Labor Statistics reported the CPI at 7.9%. Price increases in gasoline, food, and rent contributed to February’s rise in the CPI. That represents a 40-year high, according to Bloomberg. If you remove the food and energy data, core prices increased 6.4% from February 2021 to February 2022. Inflation is on the rise.
PPI: “The PPI… is a family of indexes that measures the average change over time in prices received (price changes) by producers for domestically produced goods, services, and construction. PPIs measure price change from the perspective of the seller.
- The U.S. Bureau of Labor Statistics reported the PPI is up 10.0%, year-over-year from February 2021. In December 2021, the PPI increased 0.4 percent.
- Here are the one-month movements for the last three months. In January it increased 1.2 percent, And February’s rate increased 0.8 percent, a decline of 0.0 percent from last month.
UNEMPLOYMENT: The unemployment rate represents the number of unemployed people as a percentage of the labor force (the labor force is the sum of the employed and unemployed). The unemployment rate is calculated as (Unemployed ÷ Labor Force) x 100.
- The U.S. Bureau of Labor Statistics reported that unemployment declined to 3.8% in February 2022. In total nonfarm payroll, employment increased by 678,000 jobs. That means 6.3 million people remain unemployed. This reflects data February’s data as reported on March 4, 2022.
- February’s employment data show transportation and warehousing jobs rising by 48,000. That is 584,000 higher than in February 2020. February’s job gains continued in the following industry sectors:
- Warehousing and storage: +11,000
- Couriers and messengers: +9,000
- Transportation support activities: +9,000
- Air transportation: +7,000.
All four industry sectors have exceeded employment levels for February 2020. The economy reflects job extremely strong job growth in warehousing and storage at +420,000 employees and couriers and messengers at +240,000.
ENERGY PRICES and IMPACTS. The U.S. Energy Information Administration provides short- and long-term energy forecasts. It covers consumption, production, and prices. The EIA also reports macroeconomic impacts affecting GDP. In this post, we’ll focus on energy prices.
Crude Oil West Texas Intermediate Spot (dollars per barrel). Year-over-year (YoY) prices have increased from $62.81 to $101.17. That comes to a 48.3% increase from February 2021 to February 2022. That’s a hefty price increase that will show up in transportation costs.
Natural Gas Henry Hub Spot (dollars per million Btu). Unlike crude oil, natural gas has seen a negligible rise in price YOY from $3.91 to $3.95.
Coal (dollars per million Btu). As opposed to crude oil, the price of coal has declined YoY from $1.98 to 1.67. Consumption of coal declined YoY 7 million short tons from 546 million short tons to 539. This reflects a shift in demand, as businesses transition to clean energy.
We will cover more about the impact of energy prices on the logistics industry in next week’s post.
LOGISTICS MANAGERS’ INDEX (LMI).The LMI report comprises eight leading logistics-focused metrics. Its purpose is to “… identify trends and developments in the logistics industry over time. This data will be used to generate knowledge and content relevant to the logistics industry.”
Dr. Zac Rogers, Colorado State University, surveys 100 industry professionals and then aggregates the survey results into the LMI Report each month.
Here are the eight metrics that comprise the index: (1) Inventory Levels, (2) Inventory Costs, (3) Warehousing Utilization, (4) Warehousing Prices, (5) Transportation Utilization, (6) Transportation Prices, (7) Warehousing Capacity, and (8) Transportation Capacity.
The index for February increased to 75.2 from January’s 71.9. February’s index reflects the second-highest rating, since the tracking of this index. It also reflects 13 consecutive months of expansion with no downturn in growth.
According to February’s report, the following indicators (1-6) are increasing at a decreasing rate: Inventory Levels, Inventory Costs, Warehousing Utilization Warehousing Prices, Transportation Utilization, and Transportation Prices. The final two indicators (7-8) are contracting. You can review February’s data and analysis here.
What the economic outlook means to you
The data suggest inflationary is not transitory. Instead, the data show inflation on the rise. But this is not a doom and gloom situation. Enterprising businesses can navigate any environment, including today’s pervasive volatility and uncertainty.
Some of that uncertainty is becoming more certain. Take the Federal Reserve’s recognition that inflation is no longer transitory. Also, as the government releases more data each month, volatility becomes less menacing.
Granted the war remains a major bogeyman. However, depending on how you interpret events, the war, too, is moving closer to an outcome. Whether that outcome is positive or negative for the world economy only time will tell. Regardless, there are steps you can take to avoid the worst of these events.
Mitigation strategies to keep your freight moving
The goal of tracking economic indicators is to make sense of their impacts. Your aim should be to avoid disruptions and leverage unfolding trends. The sooner you do this, the sooner you’ll leverage opportunities and mitigate obstacles.
Below are a few strategies you can put in place to temper the negative effects of today’s economy.
- Share costs. Costs are rising across the board. Now is an opportune time to “share” costs where it makes sense to do so. Look across internal and external organizational lines.
- Share opportunities. Sharing costs is one side of the coin. The other side is the sharing of opportunities. Looking for mutual benefits helps solidify relationships while making cost-sharing more palatable. As with cost-sharing, look for cross-functional or joint trade-offs and prospects.
- Adjust your product mix. Here you can put the 80-20 rule to good use and effect. You should consider ordering fewer unique and less frequently used SKUs. That will help reduce the costs of slow-moving inventory that drive holding costs. Alternatively, it allows for the increased ordering of more commonly used SKUs. That will reduce consumer choice, as you remove unique SKUs from your stocks. But it will provide more than satisfactory customer service and support.
- Adopt strategic thinking. In looking at the big picture, you can gain a competitive advantage. That happens because this approach allows you to see how the parts make up the whole. Here are two quick examples. First, you can build a cost-effective supply chain by aligning your supplier networks. Second, strategic thinking can also help you to build a customer-centric supply chain. Strategic thinking provides insights not immediately obvious without a holistic approach.
- Embrace the New Normal. Yesterday’s solutions won’t work for today’s challenges. Today’s challenges need new solutions. Now, you have to act quickly or lose out to the competition. But you must go beyond speed. You must also build an agile and resilient supply chain. And you must do so in a cost-effective manner.
- Mitigating strategies centers on building a robust, responsive, customer-centric supply chain. Purposeful tracking of economic indicators can keep your freight moving.
Next steps to ensure your freight keeps moving
To review, the economy bears not only watching but close monitoring. Continuing supply chain disruptions demand you track key economic indicators. Active tracking allows you to mitigate disruptions and identify opportunities.
Tracking key economic indicators can reveal trends, you can leverage to your advantage. Doing so can boost your business’ survivability, agility, and resilience. It can enhance the robustness of your supply chain.
American Global Logistics is a 3PL that knows how to build and sustain robust supply chains. We track events, especially economic events, for early trends in the making. We do that to ensure our clients are on the right side of change.
Contact us to learn more about how we can help you navigate today’s dicey economic climate.