Month: November 2024

Steady strong spending (and revenue)

On the day before Thanksgiving, the Bureau of Economic Analysis, reported, “Personal income increased $147.4 billion (0.6 percent at a monthly rate) in October, according to estimates released today by the U.S. Bureau of Economic Analysis … Disposable personal income (DPI), personal income less personal current taxes, increased $144.1 billion (0.7 percent) and personal consumption expenditures (PCE) increased $72.3 billion (0.4 percent).” (Numbers are NOT inflation-adjusted.)

Bloomberg noted, “Income figures from the October PCE report offer the possibility for healthy spending growth in the months ahead. Inflation-adjusted disposable personal income increased 0.4% last month, the most since January. Moreover, nominal wages and salaries rose a solid 0.5%, while the saving rate increased for the first time since the start of the year.”

Reuters highlighted, “Spending was largely driven by strong demand for services, including healthcare, housing and utilities, financial services and insurance, dining out and hotel stays as well as transportation and recreation. Services spending rose 0.5%.” Real — inflation-adjusted — expenditures on groceries continued to gradually increase. In October 2019 (pre-pandemic) the real PCE for food was $1073 billion In March 2023 US consumers spent $1141 billion chained-dollars on Food-At-Home. This completed a post-pandemic readjustment in food expenditures. Real spending on groceries has increased ever since. Last month the BEA estimates $1177 billion was spent on Food-At-Home. (here)

I am posting these October results on the morning of Black Friday. Expectations abound for record spending today and over the weekend. Tomorrow I will return here for some near-real-time results.

+++

November 30 Update: Early “flash” estimates suggests Black Friday brick-and-mortar retail sales were flat increasing less than 1 percent compared to 2023. But MasterCard SpendingPlus calculates online transactions being more than 14 percent higher for an overall sales increase of about 3.4 percent (NOT inflation adjusted). The Associated Press explained, “… the prospect of better bargains in the days ahead and the ease of e-commerce drained much of the excitement from the holiday shopping season’s much-hyped kickoff. (More from Reuters)

Flash results can morph. But if these results are more — rather than less — accurate, three supply chain implications can be derived:

  1. Online purchasing with omnichannel fulfillment continues to be intensely competitive. This is where innovation and execution can dramatically differentiate financial outcomes.
  2. Huge demand is growing at a sustainable pace. Suppliers who are effective in tracking and anticipating consumer preferences can reap significant financial rewards.
  3. 1+2=strong justification for investing in high volume and high velocity — especially effectively targeted — supply chains.

Push responds to pull

The fourth quarter has opened with abundant US flows. According to Bloomberg,

The Port of Long Beach moved nearly 1 million containers in October, beating a record set just two months ago. The surge was driven in part by importers diverting cargo to Southern California to avoid risk of delays from a labor dispute that shut every major port on the East and Gulf coasts for three days in early October. Other businesses have been bringing in goods to get ahead of the tariff increases promised by President-elect Donald Trump.  The Port of Los Angeles, which together with Long Beach account for roughly a third of all U.S. container imports, also beat records set during the pandemic in Q3. Businesses are poised to continue bringing in larger volumes of goods through the end of the year, which is normally a quieter time for the ports. The dockworkers’ dispute is still unresolved and, if there’s no agreement before January 15, there’s a possibility of a second port strike at East and Gulf coast ports early in 2025.

Second half 2024 US rail flows are much more robust than the first half (see chart below and more). Trying to work ahead of the threatened dock-workers strike may well keep volumes higher than most Decembers — and depending on if the strike is avoided or abbreviated, deepen the first quarter 2025 slowdown.

As these rail numbers indicate, intermodal trucking volumes have stayed positive, but long-haul trucking is still supply-heavy and demand-short. According to FreightWaves for the second week in November, “loads moving more than 800 miles, declined by 3.62% w/w.” The broader Cass Freight Index for October (released yesterday) also shows a continuing decline in shipping volumes — partially seasonal and partially reflecting a normalization of freight flows from August 2022 post-pandemic peaks (more). Reefer rates are climbing into the ramp to Thanksgiving, but most other categories have softened (more). DAT Trendlines reports more loads per tractor than last month or last year. But spot rates remain flat or softer.

Last week ACT research set out three key factors for the 2025 transportation sector:

Slower Freight Growth: Freight growth is projected to slow in 2025, driven by softer consumer demand and inventory adjustments across retail and manufacturing. As retailers stabilize their inventories after pandemic disruptions, freight volumes will reflect a more measured environment, with limited urgency in replenishment cycles. Capacity Rebalancing Continues: Overcapacity remains a significant challenge, particularly within the truckload market, where rebalancing efforts are ongoing. While private fleets continue to absorb a larger share of freight volume, diverting it from the spot market, the rate recovery remains prolonged. This dynamic will keep spot rates under pressure, likely delaying a clearer equilibrium until late 2025. Modest Spot Rate Gains: Truckload spot rates have seen gradual increases entering 2025, but upward momentum remains limited by ongoing overcapacity. Fleets are taking a conservative approach to expansion, waiting for further market stabilization. As inventories normalize and consumer demand stabilizes, a more favorable rate environment could emerge by late 2025, with potential demand increases in retail and e-commerce sectors driving freight needs.

Unless complicated by physical or policy impediments, freight outcomes — and most other aspects of supply — are driven by consumer demand. (And — consumer demand can even overcome many physical and policy impediments.) This morning Walmart released very upbeat Third Quarter results and upgraded its FY2025 guidance. This mirrors strong third quarter US GDP outputs (and a significant upside revision to 2023 outcomes). The upper two quintiles (more and more) of US consumers have more cash-on-hand and good cash-flow, which is — so far — translating into sustained pull for goods and services.

Pull-Push Pressures on Food

In response to pandemic constraints (and concerns) food purchases in the United States surged in March 2020 and remained elevated for two years (see first chart below). Demand exceeded preexisting supply capacity for groceries (if not for all food). Despite the sudden increase in grocery pull, price increases lagged demand increases for several months. But as demand persisted — especially after Food-Away-From-Home sales (FAFH) recovered in 2021 — prices steadily, even sharply, increased (see second chart below, follow the red line).

Real — inflation-adjusted — consumption of groceries peaked in late-2021/early 2022 and began a slow decline in actual consumption even as nominal spending continued to climb (and FAFH sales surged). This reflected easier access to FAFH and, probably, some resistance to increased grocery prices. By early 2023 grocery sales (blue lines) had sufficiently normalized that the rate of price increases decelerated (red line in second chart).

According to US Census Bureau surveys and estimates, in September 2023 grocery stores in the United States had retail sales of $72,346 million followed by sales of $73,031 in October. In 2024 September nominal (not-inflation-adjusted) sales were $72,878 million and October sales were $75,793 million. More or less? You can decide. In either case, demand as reflected in real Personal Consumption Expenditures is basically back at pre-pandemic levels. According to the USDA, during 2024 total food price inflation (FAH and FAFH) has been around 2.3 percent on an annualized basis. Grocery price inflation (FAH only) has averaged 1.3 percent. Demand and supply for food are back in balance and prices reflect that balance. The higher inflation rate for Food-Away-From-Home mostly reflects a continuing imbalance of demand and supply for food service workers.

In estimating inflation, food and fuel are often discounted or eliminated. As the charts below suggest, both consumption and prices can be volatile with related economic (and political) consequences. But these are also core expenses. The willingness — even stubbornness — of American consumers to continue higher-than-trend purchases of groceries well into 2022 had significant supply chain implications — that in my judgement are now resolved. Healthy demand is being fulfilled with sustainable supply.

Hard hit on fat target

The remnants of Hurricane Helene (September 27-28) were especially destructive for higher elevations northeast of Asheville, North Carolina. A Baxter Healthcare facility in North Cove, North Carolina along the North Fork Catawba River, about 1500 feet above sea level, was hit especially hard (NC flood map). According to the American Hospital Association, “The plant manufactures 60% of the country’s supply of IV solutions and produces 1.5 million bags per day.” As a result, in early October several IV solutions were added to the FDA shortage list.

On September 29 Baxter reported, “heavy rain and storm surge triggered a levee breach, which led to water permeating the site. The bridges accessing the site have also been damaged.” (See picture below and several more pictures at HealthExec. Video of nearby here.) The temporary “rock bridge” shown in the second picture below was facilitating site access by the first week in October. Many employees were also disaster survivors dealing with damaged homes, lack of grid power, and disrupted transportation routes. Helene slashed the preexisting capacity of both this place and these people.

Intravenous solutions are essential medical goods. They are also low-margin, commoditized products with predictable demand that can be effectively transported long-distances. This practically ensures highly concentrated production capacity, such as the North Cove facility. North Cove is Baxter’s single largest manufacturing facility. Concentrated capacity involves concentrated risk. Whenever sixty-percent of national capacity is suddenly lost, there will be potentially serious consequences and urgent need for effective mitigation. In this case, mitigation measures included:

On October 3 Baxter announced, a temporary pause in shipping several products and an allocation plan. “… After review and consideration of available inventory and the medical necessity of the impacted products, a specific limit on what a customer can order has been implemented. This allocation helps limit stockpiling and increases the likelihood of equitable access to available products. The current allocation includes saline, dextrose and PD solution products manufactured in all sizes.” (More) The company and its competitors also announced plans to increase production at other sites. On October 9 FDA authorized Baxter to import replacement products from its manufacturing facilities outside the United States. The company reported, “by the end of the year, we project that collectively approximately 200 747 airplanes full of product will be delivered to the U.S., which represents nearly 18,000 tons of product from Europe and Asia.”

On October 14 Baxter announced, “A second temporary bridge is being installed at the site, thanks to the support of ASPR (Administration for Strategic Preparedness and Response), North Carolina Department of Transportation and our local team. This will enable additional truck and equipment traffic to enter and leave the site. In the interim, our first temporary bridge has already transported more than 350 truckloads of finished product off site to begin shipments to customers.” The evacuation of existing inventory from the North Cove facility — across the temporary bridge — was an essential step in maintaining minimum product flows. As both inventory evacuation and imports increased available supply allocation limits were loosened. (More here.)

On October 17 Baxter announced, “We achieved a critical milestone in our recovery efforts this week, with full restoration of utilities, including electric capability, water and wastewater treatment. IT infrastructure is also now fully operational.”

On October 28 the FDA announced “extended use dates for some parenteral drug products, after a review of the stability data submitted by Baxter International. Providers and patients that have the lot numbers in stock will be able to use them through the corresponding new use dates to help with supply.” (More here and here.)

On October 31, the company announced, “Baxter has restarted the highest-throughput IV solutions manufacturing line. At its peak operation (prior to Hurricane Helene), this line represented approximately 25% of the site’s total production and approximately 50% of the site’s production of one-liter IV solutions, the most commonly used size by hospitals and clinics.”

On November 7 Baxter announced that a second temporary bridge has been installed at the site. Since early October, the first temporary bridge allowed for the evacuation of more than 1000 truckloads of finished product. (More here )

Earlier this week Baxter restarted a second IV solutions manufacturing line. According to the company, “Together with the line restarted the week of Oct. 28, these two lines represent – at their peak operation (prior to Hurricane Helene) – approximately 50% of the site’s total production and approximately 85% of the site’s production of one-liter IV solutions, the most commonly used size by hospitals and clinics. “

To review: mitigation included 1) demand management through allocation and related product conservation efforts; 2) distribution management by building temporary bridges, evacuating surviving inventory, and allowing importation of related products from outside the United States; and 3) production management by rapid remediation of preexisting capacity. More liberal extended use dates are a form of inventory management that I would characterize as a midstream adjustment, but not a distribution management measure. In any case, upstream, midstream, and downstream mitigation has, so far, minimized clinical consequences. The real test will probably emerge in mid-to-late December and early in the New Year as inventory drawdowns begin to pinch the most. This week Baxter noted, “While we currently expect that all lines will be restarted by the end of the year, we do not yet have a timeline for when we expect North Cove production to be fully restored to pre-hurricane levels. ”

It is worth foot-stomping that restoration/recovery/remediation of preexisting capacity is usually the only effective means of Supply Chain Resilience at scale. It is worth highlighting — and celebrating — that private-public collaboration was effective in this case. Power restoration was prioritized. Temporary bridges were rapidly constructed. Regulatory flexibility was actively and creatively deployed to enhance access to constrained products.

Prevention questions worth asking: Is it wise to ever concentrate more than one-third production or distribution capacity in any single place? Is it wise to ever place a major capacity concentration in a significant flood plain or seismic zone or storm-surge risk area or name your most deadly poison. How can preventive wisdom be incentivized? How can lessons-learned be mindfully embraced and sustainably implemented?

Close up of northwest corner of Baxter North Cove facility, showing flooded employee parking lot to left. Roughly 500 feet from midstream of the North Fork Catawba River channel.

A photo of the entrance to the Baxter North Cove facility posted Oct. 2 showing a temorray repair to the old bridge that was badly damaged by flooding, and a new, temporary gravel bridge that employee said they were told should be operating as of Oct. 3. Photo by Aerial Lens

Temporary “rock bridge” under construction to reconnect Baxter facility to US Route 221

Comparing Apples and Oranges?

In late September the Asheville, North Carolina metro area and nearby was hit hard by the remnants of Hurricane Helene  (more). In late October Valencia, Spain and nearby experienced catastrophic rains caused by the high altitude collision of warm and cold air (more) sometimes called a gota fria (cold drop).

Some comparisons:

Asheville Three Day Precipitation Total (September 25-27): 13.99 inches.  But not far away, totals were double and more.  At Busick, North Carolina near Mt. Mitchell over 30 inches were recorded over the same three days (here).

Valencia One Day Precipitation Total) (October 29): 11.8 inches.  A few miles inland — and upstream — the total precipitation was measured at over 19 inches.

Population of metro Asheville:  417,000

Population of metro Valencia: 1,580,000

Asheville Storm-related Fatalities: 42

Valencia Storm-related Fatalities: approaching 200 (still being recovered)

Elevation of Asheville: 2130 feet

Elevation of Valencia: 50 feet

Mean stream level of French Broad River (discharging into the Tennessee River): 1.78 feet.  It flooded to over 20 feet.

The stream level of the Turia River (more and more and more) (discharging into the Mediterranean Sea) is usually less than one foot.  Like the Los Angeles River, during most of the year the Turia runs close-to-dry.  There is, however, a well-known pattern of catastrophic flooding especially in September-October such as in 1957, 1895, and 1776.  On October 29 river levels exceeded 15 feet in some places.

Two very different places experience similar extreme weather.  Disruption, destruction, and death shake both areas. The physical impact on Valencia is more concentrated in time and involves a more densely concentrated population than at Asheville. Consequences are, as a result, amplified.

Comparing Valencia oranges to tart Carolina apples is treacherous.  But once again we seem to confirm that Risk = (Threat x or / Vulnerability) x Consequences. In the case of Asheville and Valencia, Vulnerability was, perhaps, roughly equal (some further vulnerability assessments are needed in both places).  Valencia’s peak Threat was concentrated in one-third the elapsed time. Valencia’s Consequences included at least 3-times more spatial concentration of people.

Demand pulling strong

The Bureau of Economic Analysis report on September Personal Income and Outlays signaled healthy and growing demand. According to the BEA:

The $105.8 billion increase in current-dollar PCE in September reflected an increase of $72.1 billion in spending for services and an increase of $33.7 billion in spending for goods (table 2). Within services, the largest contributors to the increase were health care and housing and utilities (led by housing). Within goods, the largest contributors to the increase were other nondurable goods (led by prescription drugs), food and beverages, and motor vehicles and parts (led by new light trucks). These increases were partly offset by a decrease in gasoline and other energy goods.

This increased demand was paid for with higher wages (up 0.5 percent from August) and another slight decline in the personal saving rate. Even with strong demand, the inflation rate continued to moderate. The BEA finds, “From the same month one year ago, the PCE price index for September increased 2.1 percent. Prices for goods decreased 1.2 percent and prices for services increased 3.7 percent. Food prices increased 1.2 percent and energy prices decreased 8.1 percent. Excluding food and energy, the PCE price index increased 2.7 percent from one year ago.”

The chart below reflects inflation adjusted “real” personal consumption expenditures. The blue line is total real PCE. The red line is real PCE on Food-At-Home. To be very clear: spending due to inflation has been smoothed out of these outcomes. Overall PCE has recovered its long-term pre-pandemic incremental increase. Slightly more affluent folks expend slightly more on consuming goods and services. This is good news.

The red line is also good news, but more mysterious (at least to me). During the pandemic FAH purchases suddenly surged when Food-Away-From-Home was much less available and other forms of consumption were likewise constrained. But FAH consumption has stayed higher even as FAFH reopened and many splurged on other forms of “revenge spending.” Even while spending much more on eating out and often complaining about grocery price inflation, consumers continue to expend much more on inflation-adjusted grocery purchases than they did pre-pandemic.