Month: December 2021

Monitoring M2 in 2022

For tedious — even tendentious — reasons, I have resisted consistent attention to movement in the M2 money supply measure. In my mind (until now) M2 moved this supply chain guy too far from assessments of demand and supply and too deep into economic analysis. My supply chain competence is arguable. My economic expertise is execrable.

So, this conversation has given ongoing attention to retail sales and occasional attention to the personal saving rate and to debt payments as a percentage of disposable income. I will continue to monitor and report on these indicators. (Here’s a recent example.)

But, I have decided that even a supply chain guy must now embrace the M2 explosion and try to update my half-century old (pseudo-) understanding of classical monetary theory — and profound uncertainty regarding Modern Monetary Theory (and here and here). I take this step with real reluctance and even regret. But because high volume, high velocity supply chains self-organize around demand, the persistent increase and influence in M2 (see below) can no longer be neglected.

When M2 continued to grow despite strong holiday sales, I finally decided “attention must be paid” to M2 as a meaningful signal of how and when we may reclaim something closer to demand-supply equilibrium.

You will see me struggle. I welcome questions, corrections, clarifications, and even, when possible, confirmations.

What happens when flow is stopped

In the December 29 Wall Street Journal there is a helpful visual animation of how recent supply chain disruptions share characteristics of a traffic jam. The metaphor is especially apt for the sudden diminution of global flows in February to May 2020. In my judgment the animation underplays further disruption prompted by increased demand (especially for durable goods) in the 18 months since.

CDC revises quarantine recommendation

On Monday afternoon the CDC recommended a new set of mitigation measures for individuals potentially exposed to or infected with SARS-CoV-2. The revisions reflect what is now known about the omicron variant and protections provided by vaccines. The full recommendation can be found here.

Of particular relevance to many supply chain professionals is the following excerpt from the CDC statement:

If You Were Exposed to Someone with COVID-19 (Quarantine)

If you:

Have been boosted
Completed the primary series of Pfizer or Moderna vaccine within the last 6 months
Completed the primary series of J&J vaccine within the last 2 months

  • Wear a mask around others for 10 days.
  • Test on day 5, if possible.

If you develop symptoms get a test and stay home.

The recommendation is appropriately contextual and conditional. Different risk-factors justify a differentiated response. But… in other words, if a boosted or recently vaccinated person has been exposed to infection but remains asymptomatic, no work restriction is recommended.

Testing is recommended “if possible”. This CDC language recognizes that over the next few — crucial — weeks, testing supplies may not fulfill demand created by omicron’s rapid spread. The CDC statement also includes: “For all those exposed, best practice would also include a test for SARS-CoV-2 at day 5 after exposure.” The use of that modal verb — would — is not accidental, and implies uncertain ability or likelihood for a whole host of reasons, including being asymptomatic and unaware of exposure.

Most media have so-far headlined other elements of the CDC statement (here and here and here), focusing on the isolation period for a confirmed case being reduced to five days.

As outlined in prior posts (here and here), the speed and severity of omicron’s spread could result in flows of food, fuel, pharmaceuticals, and other crucial freight depending on vaccinated and boosted workers who test positive but remain asymptomatic continuing in their roles. The CDC language recognizes that until testing is much more widely available this will sometimes be the practical outcome.

Friends and colleagues operating supply chains note that vaccination rates among their workforces are lower than the national average. If vaccine mandates are imposed, they are concerned a significant portion of their already tight workforces will walk away. If so, flow through their nodes and channels will narrow… potentially dramatically. So, this important CDC decision does not resolve current or prospective supply chain challenges. But this CDC revision does reduce constraints not well-matched with omicron’s risk for those who are vaccinated and boosted.

Preserving flows while omicron grows

On Christmas eve about 700 commercial flights serving US routes were canceled, on Christmas day another 900 plus, yesterday (Sunday) there were more than 600 cancelations (more and more). As of 5AM (eastern) today, 700 plus flights have been scrubbed. This is part of a significant global uptick. Positive covid tests for pilots, flight attendants and other air transport personnel are being blamed for a large portion of cancellations. The highly contagious omicron variant is suspected in a sharp increase in confirmed cases among flight crews.

There is no reason to assume that infections are less prevalent among workers in other production, processing, distributing, and delivery sectors, for example: health care, public water systems, food, fuel, pharmaceuticals, medical goods, and related freight operators.

Recognizing the fast moving threat, on December 23 the CDC amended its isolation guidance for Health Care Personnel. The detailed amendment includes this summary:

In general, asymptomatic HCP who have had a higher-risk exposure do not require work restriction if they have received all COVID-19 vaccine doses, including booster dose, as recommended by CDC and do not develop symptoms or test positive for SARS-CoV-2. The duration of protection offered by booster doses of vaccine and their effect on emerging variants are not clear; additional updates will be provided as more information becomes available.

This change recognizes that given omicron’s transmission velocity and ability to evade prior immunity, lengthy periods of workforce isolation or quarantine could decimate health care capacity.

The CDC continues to recommend that workers who are not Health Care Personnel quarantine for seven to ten days after potential exposure to a confirmed case. This differentiated approach is intended to minimize risks of transmission. The more contagious people circulating, the higher the risk of rapid and widespread transmission.

Given the wanton velocity of omicron’s transmission patterns, is this prudent principle still appropriate?

Early assessments suggest that omicron is much more contagious than prior variants, with case counts doubling every three days or less (here and here and here). If these early findings are accurate, there is no reason to assume that other sectors and flows do not face capacity risks similar to those facing health care. CDC decision-makers are more personally familiar with the work-force capacity risk in health care. But just as physicians, nurses, and medical technicians are needed, so are food processors, distribution center selectors, truck drivers and the other folks who keep us fed, fueled, and functioning.

Without this network of networks — these interdependent workers and functions — continuing to operate at scale, holiday travel is not the only flow about to be disrupted.

The revised CDC recommendation for Health Care Personnel recognizes that IF a worker is vaccinated/boosted and IF a worker is asymptomatic, then even with a high-risk exposure “work restriction” is not required… unless s/he tests positive. Other long-proven transmission mitigation measures (e.g., masking, physical distance, ventilation, etc.) are encouraged. Given omicron’s transmission rate, there is a reasonable case for this same flexibility being extended to workers in other sectors.

These last few days of troubled air travel signal that even more flexibility may be needed soon. Most of the pilots and flight attendants testing positive are vaccinated and asymptomatic. Many are boosted. But because they are testing positive, CDC recommendations and related industry policies have resulted in at least seven days away from work. The result is canceled flights, reduced flows, and other predictable bottlenecks and back-ups. The air travel industry is requesting no more than five days of isolation.

If omicron is as contagious and effective at evading immunity as early studies indicate (more and more and more), even five days isolation could erase an untenable proportion of flights, freight deliveries, food processing, and more high volume, necessarily high velocity flows. Temporary and quickly recurring loss of velocity can have long-term and wide-spread disruptive impacts on such networks… as we have often seen in the last two years.

If 90-some percent of omicron-related infections and re-infections result in mild symptoms or no symptoms, when, where, and how should asymptomatic, vaccinated, and boosted workers be able to continue without isolation or quarantine?

I certainly want to acknowledge each of the “ifs” noted above. But now is the time to ask and answer, if then: what, when, where, and how?

Consumption continues to climb

The November report on US Personal Consumption Expenditures shows another post-pandemic high, ten percent above the February 2020 PCE (as shown on chart below). This is, in my opinion, at least 500 billion more dollars per month in spending than any reasonable person would have predicted pre-pandemic. Until spending settles some there will continue to be price increases and occasional gaps between demand and supply (despite all efforts to calibrate). One tenuous sign of eventual reduced demand is a slight decline in the personal saving rate for November compared to month prior. (See related analysis of the November retail sales report.)

Mild for most, but…

Every variant of SARS-CoV-2 has produced mild symptoms in most of those infected. By now many of us — perhaps most of us (who do not live in New Zealand or Tonga) — have been infected but have remained asymptomatic (or barely symptomatic) and don’t even recognize our encounter with covid. But for two to three percent of those infected, results have been much more difficult, even life-ending.

There is accumulating evidence that — so far — the earliest encounters with omicron produce modest morbidity — especially when people are vaccinated. Here (again) is the most recent study out of South Africa. Here are two just-released studies from the United Kingdom, one from the University of Edinburgh and a second from Imperial College (London). I cannot yet find original source material for an analysis just completed of omicron cases in Denmark, but here is a helpful overview of three of these four reports (including Denmark’s) in this morning’s Financial Times.

In most places for most people individual risk of omicron causing serious covid is no worse or less than previously. People who are vaccinated have reduced risk. People who are boosted have very low risk of experiencing serious disease.

But omicron is very contagious, the most contagious variant yet. Omicron has also demonstrated a rather amazing ability to re-infect those with prior immunity (natural or vaccinated). Even if the hospitalization rate for omicron is the same or a bit less than prior variants, omicron’s transmission rate could push the health care system over the edge. A two percent hospitalization rate for 300 million cases will cause six-times the hospitalizations of two percent for 50 million.

Which is just a long way of saying, epidemics are less about individual risk than population risk. I am well over sixty, but otherwise my individual risk profile for serious disease is modest. I wear a mask, keep my distance, and minimize circulation to protect others from me. Mass vaccination does have individual benefits, but mass vaccination is especially important to manage risks for the most vulnerable among us. I am — all of us are — potential hosts and mutation factories for viruses. We will continue thus until we have suppressed SARS-CoV-2 worldwide. In most cases, our personal risk to this virus is negligible. But to reduce the risk to the most vulnerable — and those who are called upon to care for the most vulnerable — I want to do what I can.

There are obviously epidemiological and ethical implications here. I also perceive supply chain implications. Supply capacity is almost always the outcome of expensive long-term investments… for example in clinical facilities, pharmaceutical innovation… manufacturing… distributing, extensive professional education, and much, much more. Certainly, we want to build-in buffers for variation in demand. But there is seldom an affordable, reasonable way to develop supply capacity for a sudden doubling or more of well-established large-scale demand. So, I want to do my part to reduce demand on an already stressed system.

Keeping track

As some readers have requested, here are a few links that should help track omicron’s behavior.

While skyrocketing case counts clearly matter, in my judgment the key metric in the weeks ahead will be hospitalizations. This is our best indicator of systemic risk, both for those infected (and re-infected) and health care systems. Hospitalization is the “supply” that will be most constrained for this “demand”.

From South Africa the National Institute for Communicable Diseases Daily Hospital Surveillance Report.

From Denmark the Danish Health Authority COVID-19 Surveillance report (including hospitalizations).

From the United Kingdom there is a Coronavirus Data portal (link will take you to hospitalizations).

From the United States, the Centers for Disease Control tracks new hospital admissions (please note link to second chart).

Our World in Data at the University of Oxford also provides interactive charts for several nations (in both linear and logarithmic formats).

Dr. William Hanage, professor of the evolution and epidemiology of infectious disease at Harvard University, writes in today’s Guardian,

You cannot simply compare Omicron with Delta by adding up the numbers of cases and hospitalisations for each over a short timeframe. The numbers of Omicron cases have been growing faster – much faster – than those of Delta, and it takes time for people to become seriously ill. To accurately gauge the severity, we will need to compare the numbers of cases that end up in hospitalisation or death. 

Dr. Hanage goes on to explain it will be a few weeks before a meaningful comparison of omicron’s severity with delta’s severity will be possible.

There is increasing evidence that omicron’s impact on the South African population is less severe than prior variants. A just released study used S Gene Target Failure (SGTF) as a proxy for omicron infection as early as October 1. The not yet peer-reviewed report concludes:

Early analyses suggest a reduced risk of hospitalisation among SGTF-infected individuals when compared to non-SGTF infected individuals in the same time period, and a reduced risk of severe disease when compared to earlier Delta-infected individuals. Some of this reducton is likely a result of high population immunity.

These findings suggest (more) that South Africans infected with omicron have been 80 percent less likely to be hospitalized and 70 percent less likely to experience severe disease than those who contracted the delta variant. Omicron has, however, been much more contagious than delta, both in South Africa and elsewhere.

As previously noted, health care capacity is comparatively fixed. We do not yet have a data-derived understanding of real demand. Potential demand (as measured by new cases) is exploding. Over the next two or three weeks hospitalizations will confirm “effectual” demand. The links above should help signal what’s coming. The most effective demand management measure currently available is vaccination (especially boosters). Masking, social distancing, good ventilation, and avoiding crowded interior spaces also help.

Adapting flow to omicron

Part of the current disequilibrium of supply with demand involves flow capacity from warehouses, distribution hubs, and fulfillment centers to retail and direct-to-demand. Omicron threatens to further constrain. But there is still time to avoid the very worst.

Early last week a friend confessed his large-scale grocery distribution enterprise is getting enough inbound volume, but can not always gin-up sufficient outbound velocity to fulfill the fastest retail turnovers. The problem, he said, started last Spring/Summer when he lost many of his most experienced selectors and drivers. He has not been able to hire fast enough to fill the gaps (in both numbers and skill). (See: Journal of Commerce, Transport Topics, CNBC, Bloomberg, Wall Street Journal, Lehigh Valley Live)

According to the Bureau of Labor Statistics, in November 2021 there were just over 1.5 million “warehousing and storage” employees. This compares with about 1.28 million in November 2019. That’s almost a fifteen percent increase. Problem is retail sales are up nearly twenty-three percent over the same two years. Plenty of toil, turmoil, and trouble is embedded in that eight percent gap, especially for places where the overall national rate is doubled or worse.

Friction is added to this already tight flow by various measures intended to mitigate transmission of SARS-CoV-2 among employees. No one wants an outbreak in their facility. But omicron’s behavior suggests that over the next six to twelve weeks there will be many outbreaks. Most workplaces will be unable to avoid outbreaks of this highly contagious version of the virus.

The Centers for Disease Control offers workplace recommendations. OSHA has developed and enforced related workplace regulations. State and local public health agencies typically have the strongest legal authorities for mitigation measures, including isolation and quarantine. The recommendations and regulations are conditional. What should be done depends on context, including the vaccination status of employees. This is empirically justified. It is also administratively very complicated, especially for large-scale enterprises with operations in many different jurisdictions.

Last week I was asked about the isolation and quarantine policies of food processors, distributors, and retailers. I did not know, so I asked seven market-leaders. I heard back from five. This very informal survey found that their policies reflect CDC recommendations (unless local officials are unusually insistent). While this reach-out found variation, this essentially means that workers with a confirmed case or contact with covid are typically off the job for ten days. With a negative test, this can be reduced to seven days (but the quick survey suggested this is atypical given lack of access to testing). Two respondents suggest non-compliance is widespread due to both ignorance and intention.  But especially in union-organized work-forces, isolation and quarantines have and do impact capacity and through-put.

I was asked this question by smart, well-informed people who are aware of both the best science and official policy on workplace good practices. But as we talked, they disagreed. This is not surprising. In many ways — given our risk environment — it is realistic, even encouraging. But this realistic uncertainty is resulting in industry practices that are more rigorous than recommended by the most current CDC advisories and OSHA regulations. Until someone points me to more authoritative texts, here are the two sources that I have found especially relevant: CDC’s Interim Public Health Recommendations for Fully Vaccinated People and OSHA’s Guidance on Mitigating and Preventing the Spread of COVID-19 in the Workplace. (The CDC text was updated in October and November.)

Here is what I perceive the CDC is telling work-place managers. These are my words, not official language. The words below represent my understanding of the written text as interpreted by my management-mind into operational guidance. I am a one-time CEO, not a lawyer or epidemiologist. I am interested in safely preserving and enhancing flow. Lawyers and epidemiologists have different roles.

After exposure to a confirmed case of covid, employees should be tested within five to seven days.

Fully vaccinated employees who come in contact with a confirmed case of covid but are asymptomatic can continue working but should wear a mask when in close proximity to others.

Unvaccinated employees who come in contact with a confirmed case of covid should isolate at home for ten days or until receiving a negative test.

Employees (vaccinated or not) presenting with covid symptoms should be tested before continuing to work.

With a negative test, employees can continue working.

If an employee tests positive for covid s/he should isolate at home for ten days or until receiving a negative test.

There are exceptions, caveats, and a range of special considerations, but I understand these six statements to accurately summarize current guidance.

Some obvious implications, but just to be explicit: Vaccinated employees have greater flexibility than non-vaccinated. The more vaccination, the better potential for flow. If I have accurately understood the CDC and OSHA texts, the standard-operating-procedures reported by the five big food suppliers do not reflect the enhanced flexibility already recommended for vaccinated employees. Rapid testing can also reduce absenteeism and related friction.

But here’s the rub, based on where omicron is likely to take us between now and March, even vaccinated employees will be increasingly infected and re-infected. Many of our current work-place mitigation measures are intended to contain transmission. With omicron this intention seems to be overcome-by-events. There is a real risk of accumulated mild symptoms and positive tests decimating flow potential for food, pharmaceuticals, medical goods, and a wide range of freight. Given the contagious speed of omicron and current policies, too many nodes and links are at risk of too many ten day purges.

By the end of this week the rapidly worsening situation in Denmark and the United Kingdom may give us epidemiological confidence in omicron’s severity (aka virulence). If these real-world tests confirm that vaccinations (especially with boosters) prevent serious disease, it is probably time to allow vaccinated-boosted workers (even with a positive test) to continue working with other mitigation measures in place. I do not suggest this is an easy or obvious decision. But failing to proactively facilitate essential flows will also have profound human consequences.

Still too early to decide

We still don’t have sufficient data on the severity (aka virulence) of omicron. Here is a very helpful overview from Nature on the accumulating evidence after three weeks of intense, but necessarily incomplete analysis. As my other posts reveal, I perceive that even if omicron is less severe than Delta (or even Alpha), it is so insistently contagious that there is the potential for health care systems to be overwhelmed by a triple whammy of delta, seasonal flu, and complications of omicron. While this risk should surely spur vaccinations, boosters, and non-pharmaceutical mitigation measures, we do not yet have the data to confidently know what to expect in January and February. By Christmas eve we may have better data from South Africa, United Kingdom, and Denmark. A whole range of options for the United States is set out in scenario-based projections from the University of Texas at Austin, COVID-19 Modelling Consortium.

Three charts: deciphering demand

Most news coverage of Wednesday’s November retail sales report included something like this:

Retail sales rose modestly at the start of the holiday season, as shoppers faced rising inflation and supply shortages, and some snapped up gifts earlier. Sales at U.S. retail stores, online sellers, and restaurants rose by a seasonally-adjusted 0.3% in November from the previous month, the Commerce Department said Wednesday. That was smaller than last month’s increase in consumer prices, and a slowdown from October’s robust 1.8% sales increase. [Wall Street Journal]

Inflation and supply shortages are not exactly blamed, but the implication — repeated again and again — is that consumers are being suppressed by higher prices and lack of supply. There is, I agree, cause to believe that Americans would have purchased even more if prices had been lower and inventories had been higher. But, at least for this supply chain guy, that angle obscures the bigger story — captured in the first chart below.

An equally valid headline would be: Americans continue buying more than ever before.

This persistent level of unprecedented demand, even as pandemic savings is being spent-off (see second chart below), is the principal cause of recent retail price increases and supply chain challenges. How long can this level of demand continue? At the end of the third quarter US household debt payments were still below historic averages (see third chart below). I bet that upward curve in debt payments has continued in the current quarter. As the saving rate declines and debt payments increase, actual retail sales will return to something much closer to pre-pandemic normal.