Month: October 2023

Realistic expectations for China flows

Recently there have been signs of economic recovery in China. For example, here and here and here. It is a huge economy that has demonstrated considerable resilience despite several very hard knocks (some self-administered). It would be a mistake to under-value current conditions or future potential. But I don’t yet see evidence for much sustained, significant improvement in domestic demand, European demand, or US demand (for China’s output). Ergo, why should we expect major growth in outbound flows? I also see plenty of cause for continued — even systemic — sluggishness. This morning I heard Leland Miller give a great summary of a reality that fits what I seem to perceive — and unlike me he has the chops to offer more than wild guesses. The interview begins at about the 40:15 mark. [Please see update below video.]


October 31 Update: The Financial Times reports, “China’s manufacturing activity unexpectedly contracted in October, damping hopes of increasing momentum in the world’s second-largest economy. The country’s official manufacturing purchasing managers’ index came in at 49.5 this month, missing forecasts and trailing a reading of 50.2 in September. A reading below 50 marks contraction against the previous month.” Reuters offers this explanation: “The weak PMI data may reflect some of the weakness in demand related to the housing slump and a slowdown in infrastructure spending,” said Xu Tianchen, senior economist at the Economist Intelligence Unit. “Although there are signs of exports bottoming out, a strong recovery in external demand is probably elusive,” he added. Both new export and imports orders shrank for an eight consecutive month, suggesting that manufacturers were struggling for buyers overseas and ordering fewer components used in finished goods for re-export.”

November 7 Update: The Wall Street Journal reports, “Chinese exports fell 6.4% in October compared with a year earlier, to $275 billion, China’s General Administration of Customs said Tuesday (November 6), a steeper decline than the 6.2% fall recorded in September… Diminishing exports show global demand for Chinese goods is subdued as consumers and businesses contend with slowing growth and higher borrowing costs. Other Asian export powerhouses, such as South Korea and Taiwan, have also reported months of feeble overseas sales.”

Winter Preparations

In an October update Emily Becker with the US National Oceanic and Atmospheric Administration (NOAA) forecasts, “El Niño will continue through the spring, with a 75-85% chance it will become a strong event. A stronger El Niño… means it is more likely that we will see El Niño’s expected thumbprint on winter temperature and rain/snow patterns around the world.”

In yesterday’s Sunday New York Times, three economists argued:

El Niño’s warming builds on top of the already warmer average temperatures that come with climate change. This makes El Niño’s ancillary impacts — higher food prices, more infectious diseases, and even civil war — increasingly more likely, and dangerous. It also provides a warning sign of what is to come as climate change worsens. Our research suggests that this year’s El Niño could lead to events like crop failures that push up to 6.8 million children into severe hunger. (Their original research is here.)

Depending on location El Niño and La Niña periods can have opposite effects (see map below). More rain for the US Southwest and Texas is not necessarily bad news, but major flooding would not be welcome. It is hard to find a silver lining for high heat and low precipitation across South Asia or the Amazon basin or Southern Africa.

Where I sit today, it is a bright day in early autumn. As recently outlined here and elsewhere, the US economy is bustling about and surprisingly strong. Many leading indicators are fine or better than fine. I live in that dark green (cool and wet) spot over the Southeast United States. It has been too dry. We need the precipitation.

Probabilities are not certainties. But we ignore plausible patterns at our peril. When I combine climatological probabilities with troublesome economic probabilities (here and here and here) and geopolitical patterns (here and here and here) — well, an icy winter seems all too likely despite warm sunshine here and now.

Even for those reasonably well-prepared, a collision of hard hits can cascade tough consequences across demand and supply networks. Hidden vulnerabilities are unveiled. Systemic risks are amplified. Given the interdependencies of contemporary supply chains, the ill-prepared are unlikely to be the only ones left dancing (see farther below).

Pulling push persists

To the extent that demand pulls, sizes, and organizes supply — and in most advanced economies, this is mostly the case — then consumption can be said to fuel supply. According to the Bureau of Economic Analysis:

Personal income increased $77.8 billion (0.3 percent at a monthly rate) in September. Disposable personal income (DPI)—personal income less personal current taxes— increased $56.1 billion (0.3 percent). Personal outlays—the sum of personal consumption expenditures (PCE), personal interest payments, and personal current transfer payments—increased $175.1 billion (0.9 percent) and consumer spending increased $138.7 billion (0.7 percent). Personal saving was $687.7 billion and the personal saving rate—personal saving as a percentage of disposable personal income—was 3.4 percent in September.

The first chart below displays a five year trend for overall nominal PCE and Real PCE. The second chart is focused on nominal and real expenditures on food-at-home. It is meaningful to me that in September 2023 US consumers spent 1154.9 billion inflation-adjusted dollars on food compared to 1160.1 billion inflation-adjusted dollars in September 2022. This suggests more careful shopping by millions.

Still, on the whole Americans continue to spend more. In September expenditures on cars, pharmaceuticals, and travel showed particular strength (more). Personal outlays grew at a rate more than double personal income. Bloomberg quotes two economists who say, “Consumers continued to live beyond their means in September, with personal spending growth far outstripping income gains … We think that dynamic cannot persist much longer.” I wonder about the implications of potentially very different expenditure patterns by the top two income quintiles compared to the bottom three quintiles.

In any case, this year the overall US economy has continued to show rather amazing strength (see third chart below and more). Wages are increasing. Over 9.6 million jobs are currently “open“. Given recent demand — and the prospects of similar demand — I expect the current level of supply activity to persist at least through the end of the year.

Hearing does not always mean listening

Yesterday I watched/listened to most of a hearing conducted by the Budget Committee of the United States Senate entitled: Bottlenecks and Backlogs: How Climate Change Threatens Supply Chains. The link provides access to a video of the hearing and separate links to the prepared testimony of five expert witnesses. The testimony of Kathy Fulton and Scott Kelly each offer particular attention to supply chain capacity concentrations, a frequent focus of this blog.

In one way or another, explicitly and not, all five witnesses give attention to capacity concentrations, climate change, and supply chain adaptation. There were five different angles on reality. Each angle is worth your time to scan and consider.

I do not recommend watching the video rehash the hearing’s political theater. I did not hear many — perhaps not any — authentic questions. I heard too much posturing and positioning regarding pre-cooked political/ideological angles. I wish the senators would have listened more carefully to the witnesses and given more time to supply chain related questions.

The hearing began shortly after 10AM Eastern Time. I pulled up the hearing a few hours into watching Hurricane Otis explode into Acapulco (more and more and more and see the NASA time-lapse below). Then just as the hearing opened Hurricane Tammy surprised me. A fresh NHC update for this North Atlantic cyclone noted, “sustained winds have increased to near 105 mph (165 km/h) with higher gusts.” This late-stage rapid intensification is an increasing challenge. Just last week a new study reported, “Mean maximum Tropical Cyclone intensification rates are up to 28.7% greater in a modern era (2001–2020) compared to a historical era (1971–1990).” The last two years I have seen a similar threat spin up too close to Tampa. There are plenty of other crucial capacity concentrations that are as vulnerable.

On two screens I watched weird weather swirling with real-time force, while on a third screen I heard a weird debate regarding climate-related epistemology: What can we know? What do we know? How can we appropriately adapt to what we know?

Especially in terms of supply chain risk there can be a range of plausible answers to these questions. It often depends on the particular network, its innate vulnerabilities, and the specific threat (Force-On-Target) involved… an earthquake is different from a cyclone which is different from a cyber-attack which is not the same as a sudden loss of labor regardless of cause…

But we can know, we do know — as Kathy Fulton and Scott Kelly set out (and at least two other witnesses seemed to agree) — that supply chain capacity is increasingly concentrated. This concentration of demand and supply is often happening in places susceptible to extreme weather (climate change or not), seismic activity, and other aspects of punctuated equilibrium (here and here). This increased exposure to risk (and, plausibly, increased risk frequency and intensity) can have catastrophic consequences when, in Kathy Fulton’s words, “these capacity concentrations are disrupted due to extreme weather events, bottlenecks become chokepoints, and the impacts can ripple far beyond the communities in which they exist.”

Too often the human mind is fixated on the urgency (or not) of a perceived external threat rather than the implications of self-created vulnerabilities. External threats are almost always tough to predict and manage. Many of our vulnerabilities are self-created and, as a result, fully susceptible to self-managed mitigation… if we will accept that reality and our related responsibilities.

“The above animation shows Otis in the eastern Pacific Ocean as it’s making its way northward towards the southwest coast of Mexico.  The animation begins with a 24-hour time loop of surface rainfall estimates from NASA’s IMERG precipitation product starting at 7:11 a.m. CDT (12:11 UTC) Oct. 23 when the center was about 400 miles (640 km) south-southeast of Acapulco…” NASA Global Precipitation Measurement

Bad but getting better?

Below are the USGS water gage outputs for the Mississippi River at Memphis. Last week an all-time recorded low was reported (blue line), even lower than last year’s (brown line). According to Yale Climate Connections:

In Memphis, Tennessee, the river dipped to a new record-low water level of -10.81 feet on Saturday, October 22. The previous record was -10.70 feet, set on July 10 during the notorious summer of 1988. That year had America’s costliest drought since at least 1980, with $51 billion in damages. Data for the Memphis gauge goes back to 1933. (Typically, the zero level on a river gauge is set so that values go negative only during prolonged, intense dry spells.)

Extended drought across much of the great river’s watershed (here and here) has meant reduced agricultural yields in many places. (But as the harvest moves into the second half, I am hearing reports of better yields than expected in some places. A few random showers and better genetics are being credited.) Midstream flows of export crops are being constrained by the reduced stream flows (more and more and more). Further downstream an even more urgent threat has emerged as the reduced flow of fresh water is allowing salt water to move upstream threatening drinking water supplies (more and more).

Fragile and Unstable Equilibrium

That’s an accurate distillation. A whole host of flows demonstrate a rough current balance of demand and supply. There are manifold endogenous and exogenous sources of instability. While many flows are huge, there are so many active sources of instability and potential chokepoints it would be foolish to deny innate fragility.

This helpful phrase is how the International Gas Union describes the 2023 market for natural gas:

Gas prices have cooled in 2023, largely due to demand-side adjustments in Europe and Asia, yet they remain above pre-covid and pre energy crisis levels. The shortage of global supply, which was the key reason behind last year’s shocks, is still there: the market is in a state of a fragile and unstable equilibrium. This cooling has been driven by demand contraction, marginal supply growth and infrastructure debottlenecking. Nonetheless, Europe’s growing dependence on LNG has rendered global gas prices increasingly vulnerable to global LNG supply risk.

Most of the IGU Global Gas Report was completed before the October 7 explosion of conflict between Hamas and Israel — with potential significant repercussions for global energy markets. In a last-minute preface, last week the IGU warned:

While Europe’s commendable rapid development of new infrastructure and efficient utilisation of existing gas networks has been critical in rebalancing the regional situation, we should not forget that it does not eliminate the lingering supply risk, as global gas supply remains just as constrained. Undoubtedly, we saw greater focus on energy security by governments, energy companies, and financial institutions, with investments in infrastructure for source diversification and alternative energy sources. This helped to establish a new equilibrium in the gas market, although it remains unstable and seems already challenged by the new conflict in the Middle East between Israel and Hamas.

“Fragile and unstable equilibrium” can also describe flows for rice, wheat (more), diesel, many semiconductors, whole categories of pharmaceuticals, and much more.


October 24 Update: S&P Global provides the following angle on potential instability in European gas flows — even with winter inventories topped off. “The Platts assessed Dutch TTF front-month contract jumped 45% to a 9-month high of Eur55/MWh Oct.13, despite near full European storage levels. This rally coincided with the start of the Israel-Hamas war, announced industrial action at Chevron’s Australian LNG facilities, alleged “external activity” damaging the Balticconnector pipeline. A series of bullish news over the Oct.7-8 weekend sparked geopolitical and supply uncertainty in an already volatile natural gas market.”

Geopolitics, Energy Transition, and Demographic Change

Yesterday the team at Bloomberg Surveillance interviewed Alex Brazier from BlackRock. It was an often nerdy, but strategically valuable conversation. The Great Moderation is over. Mega forces point to significant regime changes. We are on the edge of a generational re-set. We will experience a series of “negative supply shocks”. Geopolitics, the energy transition, and demographic shifts will be the principal drivers. The discussion begins at about the 57 minute mark, it continues for about seven minutes.

Running loose (into trouble?)

The most recent measure of the Global Supply Chain Pressure Index continues at well below the long term average. Despite global inflation, fog and friction of war(s), purposeful production cuts, and increasing complexity of flows, volume is strong. Velocity is much better than two decades ago… or even two years ago.

Agricultural Production: The last several months I have focused on North American output. As Spring begins in the southern hemisphere, I will expand this scope. Wheat and rice are used as indicators. According to USDA, “The outlook for 2023/24 U.S. wheat this month is for higher supplies, increased domestic use, unchanged exports, and higher ending stocks. Supplies are raised 85 million bushels… The global wheat outlook for 2023/24 is for reduced supplies, lower consumption, decreased trade, and lower stocks… Projected 2023/24 global ending stocks are lowered 0.5 million tons to 258.1 million, the lowest since 2015/16.”

“The 2023/24 global rice outlook is for slightly increased supplies, consumption, and trade compared with last month, leaving ending stocks nearly unchanged. With minimal changes to rice production globally, higher beginning stocks for Indonesia explain most of the increase in 2023/24 global supplies. Global trade is raised this month for both 2022/23 and 2023/24 as Indonesia, the fourth-largest rice-consuming country, imports more to replenish government stocks on supply concerns. Global exports are raised slightly on increases for Cambodia and Vietnam. Ending stocks are nearly unchanged from last month at 167.5 million tons, with an offsetting increase to stocks for Indonesia and decreases for China and Colombia, but remain the lowest in six years.”

Global Natural Gas Demand and Supply: Robust production, strong European inventories, and still lack-luster global demand had recently kept prices in check. But the Israel-Hamas conflict — and the risk of wider war — has raised concerns regarding disrupted supplies. Yesterday S&P Global reported, “Gas price benchmark TTF front-month jumped 46% over the course of the week to a Eur52.95/MWh close Oct. 12, the highest in almost eight months… Market participants indicated covering of short positions contributed to the sharp rebound across gas and power markets just ahead of the start of the winter heating season with geopolitical risks trumping supply and demand fundamentals.” US natural gas production, inventories, and flows are healthy.

China Export Volumes and Value: CNBC headlines, China’s exports and imports drop again in September. Bloomberg highlights, “China’s Export Slump Eases as Beijing Works to Bolster Outlook. The South China Morning Post explained, “Exports to the Association of Southeast Asian Nations – China’s largest trading partner – contracted by 15.82 per cent last month, while September’s shipments to the United States fell by 9.34 per cent, year on year, extending a 14-month streak of continuous declines. Exports to the European Union, meanwhile, dropped by 11.61 per cent last month, year on year. “Exports continued to see broad-based weakness across regions and by products,” said economists at HSBC. “Global growth continues to face pressure from tighter monetary conditions while global-goods demand remains weak, relative to services.” (More and more.)

North American Grid Capacity: Wednesday the Energy Information Administration offered:

We forecast that electricity generation from natural gas will account for about 42% of U.S. generation in 2023, an increase from 39% in 2022. This increase is the result of relatively low prices for natural gas; the retirement of 10 gigawatts (GW) of coal-fired generating capacity this year; and 5 GW of new, highly efficient natural gas-turbine capacity entering service. We expect natural gas-fired electricity generation to fall slightly to a 41% share in 2024. Despite a forecast increase in overall electricity generation in 2024, we expect generation from both natural gas and coal will fall next year in part because of increasing generating capacity from renewable sources. Our forecast assumes 40 GW of solar and wind generating capacity will enter service next year, an increase of 16% from this year, leading to the share of electricity provided by renewables rising from 22% in 2023 to 25% in 2024.

This substantive transition is challenging, especially for places with fast-growing demand — like Texas. According to Bloomberg, “The Texas grid operator is seeking to secure an extra 3,000 megawatts of power reserves this winter to avoid an “unacceptable” risk of an emergency in extreme conditions. The Electric Reliability Council of Texas estimates that there is an almost 20% probability that the state grid it manages will enter into an energy emergency alert, or EEA, if there is a repeat of last year’s December storm…” (more and more).

US Personal Consumption Expenditures: Given the stronger than widely anticipated September US Consumer Price Index, the September PCE will probably also show continued resilience. The chart below suggests why. Again I am “hitting the slopes” as well as twinning two distinct measures. The blue line is Disposable Personal Income. The growth rate has slowed, but nominal (not-inflation-adjusted) levels have increased more than 10 percent over the last two years — and by almost one-fifth compared to pre-pandemic. In combination with the red-line’s trajectory (Average Weekly Private Sector Earnings), I don’t see any persuasive reason to anticipate a sudden collapse in US consumer demand, despite marginally reduced personal savings, resumption of student loan payments, rising credit card balances, and more. It is, however, worth noting that US demand has been a persistent outlier among global advanced economies. This week the IMF World Economic Outlook forecast, “global growth to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024, well below the historical (2000–19) average of 3.8 percent. Advanced economies are expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening starts to bite. Emerging market and developing economies are projected to have a modest decline in growth from 4.1 percent in 2022 to 4.0 percent in both 2023 and 2024.” (More)

There are many mixed measures of supply chains resilience. There are plenty of pinch points and accumulating friction. But given the factors outlined above — and the bounding risks of war and climate disruptions — current conditions in most places are more positive than I often feel should be the case. I am not alone in experiencing some dissonance between what I feel and what I can confirm (see here).

October 18 Update: September retail sales, released yesterday, confirm continued US consumer spending. China’s most recent retail sales report also shows the best improvement since May. Retail consumption in the European Union remains sluggish. Quickly scanning September results for the United States I shave a bit for inflation (your guess is as good as mine until we get the PCE deflator in a couple more weeks). Given the volatility of fuel prices — and last year’s even higher fuel prices — I tend to avoid this teeter-totter as telling me much about the rest of the playground (especially given current geo-politics). I notice that shelter related sales are down about 2 or 3 percent compared to 2022 Year-To-Date. Grocery sales are up over 3 percent for the same period. Eating out is up almost 12 percent. It looks like ecommerce continues to eat up a higher proportion of clothing and general merchandise sales. I am amazed at how much more disposable income is being spent on eating out, otherwise I perceive a demand-and-supply-system behaving more or less at equilibrium. So — if you are a visual thinker — maybe you might imagine a basically healthy, slightly over-weight man walking quickly to make his next appointment while trying to eat an Egg McMuffin (with a hash brown). Unless he trips (or is pushed) he should make his meeting a bit sweaty but okay.

September CPI and supply chain fitness

Yesterday’s Producer Price Index and this morning’s Consumer Price Index (both for September) each confirm robust US demand (more and more and more). Most American consumers remain active and ready to spend.

Pricing trends suggest that demand exceeds current supply in several categories, including shelter, energy, and most energy-related categories such as transportation. This summer prices for used cars and trucks softened considerably, implying a better balance of supply and demand than this Spring or most of last year. Where prices have fallen most (e.g., natural gas), it is often the result of previous price-increases arguably over-shooting any credible mismatch with supply — and/or over-estimating demand.

Over time price increases that maintain or exceed recent profit margins typically attract more reliable supply — at least until prices reach a point of demand destruction. Mature markets sometimes feature disciplined (often dominant) suppliers reluctant to increase costs or reduce margins related to shifts in demand perceived to be ephemeral. Immature markets often do not have the existing capacity to fulfill demand significantly higher than long-expected. Gradually increasing demand is, usually, the most supportive of Supply Chain Resilience.

I expected increased demand for food during the pandemic would prove transitory. Instead it seems to have claimed a new normal, please see chart below. Both Food At Home (blue line) and Food Away From Home (red line) have far outpaced any prior rate of sustained growth. Fulfilling this demand was a challenge between 2020 and early 2022. But this year a healthy equilibrium of demand and supply seems to have been achieved. According to the Bureau of Labor Statistics:

The food index rose 0.2 percent in September, as it did in the previous two months. The index for food at home increased 0.1 percent over the month, after rising 0.2 percent in August. Three of the six major grocery store food group indexes increased over the month. The index for meats, poultry, fish, and eggs rose 0.5 percent in September as the index for pork increased 1.6 percent. The index for other food at home increased 0.3 percent over the month and the index for dairy and related products rose 0.1 percent. The index for cereals and bakery products decreased 0.4 percent in September, the first decline in that index since June 2021. The fruits and vegetables index was unchanged over the month, as was the nonalcoholic beverages index. The food away from home index rose 0.4 percent in September. The index for limited service meals and the index for full service meals each increased 0.4 percent…. The food at home index rose 2.4 percent over the last 12 months… The index for food away from home rose 6.0 percent over the last year.

Food and fuel have often been the most volatile elements in the Consumer Price Index. During 2023 Food At Home has been remarkably stable. This reflects strong upstream capacity, efficient midstream distribution, a competitive downstream retail context, and persistent, consistent consumer demand (more) that has — so far — resisted down-shifting much from the new normal achieved over the last year-plus.

Whither goest demand

Supply tracks demand. Push follows pull. Flow seeks fulfillment — unless demand is silenced, unless push is obstructed, unless flow is drained by extreme upstream drought.

According to the Wall Street Journal, “U.S. hiring surged last month, the latest sign of accelerating economic momentumEmployers added 336,000 jobs in September, the strongest gain since January and up sharply from the prior month’s upwardly revised 227,000 gain… Job growth was also stronger in July than previously estimated.” (See blue line on the chart below.)

The Bureau of Labor Statistics also reports, “In September, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents, or 0.2 percent, to $33.88. Over the past 12 months, average hourly earnings have increased by 4.2 percent. In September, average hourly earnings of private-sector production and nonsupervisory employees rose by 6 cents, or 0.2 percent, to $29.06.”

Given these employment outcomes we should not be surprised if September Personal Consumption Expenditures (PCE) show continued strength (see red line below for PCE through August).

Many are very surprised by the September employment numbers. Bloomberg Economics was expecting closer to 173,000 new jobs. I sympathize with this gap. In recent weeks I have blogged less than usual. When I am missing in action here that usually means intense action in non-digital spaces. But this time my quiescence is much more the consequence of stubborn paradox. I am always uncertain. But the last few weeks my best assessments have been self-contradictory. Evidence available to me on the direction, speed, and rate of change related to the resilience of future flows has been especially inconsistent, even antagonistic.

I remain confident in the power of demand. I see where demand has been. I’m especially uncertain where demand is going and how quickly demand will shift — whichever way it goes.