Supply Chain Resilience

January consumption expenditures ticked-down just a tad (see first chart below). Given unusually cold weather and perhaps some post-holiday restraint, this is not unprecedented nor necessarily the start of a pattern. January 2024 expenditures ($15,812.6 billion 2017 dollars) were lower than December 2023, but by last month US personal consumption expenditures had grown to $16,283.6 billion 2017 dollars).

The December 2024 to January 2025 decline in consumption expenditures was led by a 40-plus-percent drop in auto sales. December is almost always strong for auto sales and January is almost always weak. Looking under the auto industry’s hood suggests mixed results for January 2025. According to the Bureau of Economic Analysis in January US consumers spent a little less on goods and a little more on services. This included 4.6 percent less on food and beverages, 11.6 percent more on gasoline (here and here) and other energy goods, and 13 percent more on eating out and travel accommodations.

I like to track Food At Home (FAH) consumption expenditures. Pre-pandemic I perceived shifts in real — inflation adjusted — PCE for food to be meaningful indicators of consumer distress or delight. Post-pandemic I have mostly been amazed at the step-wise increase in how much more food Americans consume (see second chart below). These sort of grocery store sales suggest to me a substantial slice of US consumers are not looking for deep cuts on discretionary expenses.

Delighted, distressed, or desperate these consumption patterns should be helpful to watch if and when more rigorous tariffs are imposed. A ten percent increase on imports from China was put in place in early February, a second ten percent has been promised. Late January tariffs of 25 percent on many (not all) goods from Mexico and Canada were suspended for negotiations. The negotiation period is scheduled to conclude on March 4. Steel and aluminum tariffs are scheduled to be implemented on March 4. Studies are underway to set reciprocal tariffs. Other tariffs have been discussed.

Tariffs add costs and sometimes delays. Increased costs usually increase consumer prices. Depending on the size and timing of tariffs — and the accessibility and price of replacement products — tariffs will often influence consumer behavior. High volume, high velocity supply chains tend to depend on persistent demand and supply capacity specifically organized around persistent demand. Sudden shifts in demand can be disruptive. The scope and scale of disruption depends on the depth and duration of the demand shift, as demonstrated by both of the charts below for several months following February 2020.

According to the Bureau of Economic Analysis, December demand — measured by Personal Consumption Expenditures — increased 0.7 percent compared to November. This was almost twice the rate of increased personal income (0.4 percent) continuing a steady — supply-chain-friendly– ascent in real (inflation-adjusted) consumption that started in mid-2021. See first chart below.

In response to this sustained demand (sustainable is a different issue), US productivity continued to climb. The real US Gross Domestic Product increased 2.3 percent in the fourth quarter of 2024. See second chart below. According to the BEA, “The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributor to the increase was health care. Within goods, the leading contributors to the increase were recreational goods and vehicles as well as motor vehicles and parts.” Employment continues to be what has been considered healthy since the 2008 Great Recession (here and here and here). Real average earnings are at or above pre-pandemic trends.

Connecting demand to supply continues to demonstrate some excess capacity (but less than December 2023 or September 2024 for that matter). Last week Todd Davis at Sonar aggregated the following recent trucking indicators and much more.

• Spot Rate Trends:
  • December 2024 spot rates peaked due to holiday capacity constraints and shorter hauls, not increased volume.
  • Tender rejection rates rose to 10.16% on Dec. 22, more than double the 2023 Christmas peak of 5.58%.
• Refrigerated Truckload Market (Reefer):
  • Reefer rates hit seasonal highs in January, driven by protect-from-freeze demand during cold weather.
  • Rejection rates remained above 14% post-Christmas, reflecting tighter capacity than in the dry van market.
• Dry Van Market:
  • Rejection rates are increasing but remain lower than those in the reefer market, indicating looser capacity.
• Flatbed Market:
  • Flatbed rates declined throughout late 2024, with recovery unlikely until spring due to seasonal demand lulls.
• Regional and Seasonal Dynamics:
  • Local freight demand grew by 7% in December, while long-haul shipments dropped nearly 10%, with more freight shifting to intermodal transport.
  • Weather disruptions in January impacted operations, particularly in the Midwest and Southeast.
• Market Tightness and Outlook:
  • Gradual tightening is evident, with capacity becoming noticeably strained during peak seasons.
  • Spring 2025 could bring capacity challenges if seasonal demand rebounds sharply.

Downstream pull is positive. Upstream push is well-calibrated with pull. There is some turbidity and volatility in the channels between push and pull, but plenty of ability to keep flow going.

Tomorrow, Tuesday, January 7, face-to-face negotiations resume between the International Longshoremen’s Association (ILA) and the US Maritime Alliance (USMX). Dockworkers and port operators are facing a January 15 (extended) contract expiration deadline. According to Bloomberg, the crux of the stand-off involves “the use of semi-automated, rail-mounted gantry cranes at port terminals… Such equipment is permitted in the current contract and is already in use at some ILA-operated terminals, but union President Harold Daggett has said he won’t accept a contract that allows for any degree of automation, which he sees as a threat to dockworker jobs.”

In a December 20 statement, USMX argues:

A new Master Contract is essential to keeping our ports open and our supply chains strong. That is why USMX has tentatively agreed to a 62% wage increase for ILA members over the next six years, contingent upon finalizing all outstanding issues—a historic leading wage increase that showcases our commitment to American workers. Beyond the wage increase, central to successfully reaching a new long-term agreement is how we can also strengthen the ability of USMX members to make critical investments in technology and infrastructure to densify and improve the safety, productivity and efficiency of our ports, which provides a direct benefit to both ILA members and businesses in nearly every sector of the U.S. economy. American businesses rely on continuous improvements at our ports to help streamline their supply chains through expediting cargo turn times, attracting more vessel calls, and increasing overall capacity to meet their growing business demands on the export or import side.

On December President-elect Trump met with ILA leadership. Afterward he posted on social media, “I’ve studied automation, and know just about everything there is to know about it… The amount of money saved [instead of employing workers] is nowhere near the distress, hurt, and harm it causes for American workers, in this case, our Longshoremen… I’d rather see these foreign companies spend [profits] on the great men and women on our docks, than machinery, which is expensive, and which will constantly have to be replaced. In the end, there’s no gain for them, and I hope that they will understand how important an issue this is for me” (here and here).

A strike would seriously disrupt maritime flows from Boston to Houston, involving more than half of US container imports (see chart below). Maersk and other ocean carriers have urged customers to retrieve cargo before the end of next week (here and here). US West Coast ports have increased throughput as shippers seek to avoid potential close-downs (here). An extended port shutdown would seriously disrupt, delay, and increase costs across many US supply chains.

While obvious, it is sometimes helpful to be explicit: In most high volume supply chains, midstream functions (at the neck of the hourglass — here and here) are the crucial accelerants or constraints on velocity.

+++

January 8 Update

CNBC reports that a preparatory discussion was held on Sunday, January 5 between ILA and USMX, “A document produced from the meeting and reviewed by CNBC indicates ports willing to pair any new technology with new union jobs, but it could also introduce new risks to a deal, with added labor costs threatening terms agreed to in October for a 62% pay hike for union workers.”

On Monday gCaptain published a port operator perspective on the negotiations that is consistent with scuttlebutt emerging from my personal network. It is the insider details that matter most, so no pull quote on this one.

The Financial Times frames this particular contract negotiation in a broader context, “What were previously run-of-the-mill negotiations over pay and conditions have mushroomed into larger, more existential disputes over the relationship between humans and machines. Some 70 per cent of the 12mn people represented by the American Federation of Labor and Congress of Industrial Organizations now worry about being replaced by technology, estimates AFL-CIO President Liz Shuler: “Workers are fed up with how they’ve been treated for a long time and are scared about what the future might hold.” Whatever contract the longshoremen negotiate, say analysts, could help provide a template for agreements nationwide.”

January 9 Update: ILA and USMX have reached a tentative agreement. USMX and ILA released a very brief joint statement. (More and more)

Forecasting earthquakes, volcanic eruptions, cyclones, flood, fire, famine, epidemics, cyberattacks, and war is easy. Shifting demand patterns and supply disruptions are de rigueur. Predicting when and where is the tough — typically impossible — task.

Resilient choices are often neglected because we discount directly experiencing where and when. Answering why these threats — and our self-created vulnerabilities — persist and proliferate can prompt vigorous disagreements that dilute investments in resilience. Uncertainty regarding when and where too often undermines strategically mindful choosing.

Acknowledging that precisely when and where are beyond my competence, I am ready to claim considerable confidence that in the foreseeable future we will experience:

Flows disrupted by destruction: Current high volume, high velocity flows of food, fuel, critical materials, manufactured goods, professional services, and more emerged from a vortex of Nineteenth Century engineering (e.g., Suez Canal, railways, sea ports), mid-to-late Twentieth Century trade policies (e.g., free-trade agreements, expanded Major Favored Nation status), and early-Twenty-First Century technologies for expressing demand, developing supply capacity, and transacting trade (e.g., communications, computing, related financial tools, and other cyber-vulnerable functions). These flows have created and tend to reinforce various forms of comparative advantage. Over time these comparative advantages have tended to concentrate capacity (and wealth-producing potential) for particular goods and services in particular places and, often, a small set of commercial players. The more capacity is concentrated in one place and proximate places, the more likely some random event — or intention — will disrupt or destroy such capacity. For example, when more than half of national production capacity for an essential healthcare product is suddenly off-grid, off-road, and flooded. Disruptions and destruction of high-proportion capacity concentrations –upstream, midstream, and downstream — are the consequence of endemic structural characteristics of high volume, high velocity flows. Such events will recur. To the extent demand/supply concentration accelerates, threats intensify, and vulnerabilities are neglected — risks increase.

Flows disrupted by competition: The more capacity is concentrated, the more likely dysfunction and disruption (see above). The more systemic dependencies are exposed by dysfunction and disruption, the more likely challenges to current comparative advantages are stimulated — either as a result of commercial efforts to exploit gaps or as expressions of national /regional self-interest to secure wealth-producing potential. For example, when pandemic-related frictions exposed the capacity concentration in (and constraints on) semiconductor manufacturing both national and commercial interests responded. In the last two years there has been an intense, expensive, and still evolving effort to reduce concentration and diversify geographic sourcing of semiconductors (here and here and here). Diversification — or de-concentration — could eventually generate enhanced systemic resilience. But getting there will be complicated and treacherous. Actions intended to protect or advance one source of capacity will usually prompt a competitive response from other sources of capacity. For example, according to Foreign Policy,

The U.S. Commerce Department announced new export controls that target China on Dec. 2, including controls on 24 types of semiconductor manufacturing equipment, three types of software tools for developing semiconductors, and high-bandwidth memory chips. It will also add 140 companies, many of which are based in China, to an “entity list” that places a licensing requirement on the purchase of U.S. technology. Beijing responded within hours of the U.S. news and struck back by announcing its own export ban on key tech materials such as gallium, germanium, and antimony, which is a seemingly obscure metal that actually has vital defense applications. It also plans to tighten its exports of graphite, a raw material that underpins electric vehicle batteries.

This sort of competitive push and pull — by both macroeconomic and microeconomic players — increases flow volatility, turbidity, and uncertainty. Tit for tat sanctions, tariffs, saber-rattling, warning shots, price manipulation, market-dominant dumping, and most-favored-customer allocations increase systemic friction across demand and supply networks. When and where these frictions may prompt failures are, as noted, tough to predict — and can be very complicated to unravel post-hoc.

Flows disrupted by anxiety. As volatility increases, so does uncertainty. The more uncertain any context, the more widespread actions to reduce individual risk can substantially increase system-wide risk. The most common disruptors (even destroyers) of flows are fear-based sudden, unsustainable shifts in consumption, usually involving more consumption (aka hoarding), but much less consumption can also be disruptive. High volume, high velocity flows depend on upstream and midstream capacity well-calibrated to downstream pull. When sustained mis-calibrations occur response capacity is typically structurally constrained. Too much demand will drain downstream stocks with insufficient midstream capacity to quickly replenish. Reduced demand or increased demand or redirected demand will result in network congestion that further complicates adaptation. The more disruption, the less flow, the more fear, the more complications to restoring flow. For example, in August following a 7.1 earthquake in Southern Japan there was a surge in demand for groceries and other essentials across a wide area of Japan (here and here). A grocery store in Tokyo posted signs explaining, “Potential sales restrictions are on the way” and bottled water was already being rationed due to “unstable” procurement. Both “excess” consumption and “under-” consumption tend to reflect self-amplifying consumer anxiety.

I predict that destruction, competition, and anxiety will persist in the year(s) ahead. I don’t know when, where, or why each — or all — will spike. But I do know that when and where it happens the health and even survival of the impacted population will depend on how well preexisting supply capacity quickly adapts to post-disaster contexts. In most situations this adaptation will happen so effectively that most consumers will barely notice. But I also predict that when preexisting concentrated capacity is also hard-hit, response and recovery will be complicated, ugly, delayed, and more deadly than necessary. In the vast majority of places — even where capacity is most highly concentrated — we tend to discount and even dismiss our risk.

Best wishes for the New Year.

+++

A small collection of other year-end reviews and forecasts relevant to Supply Chain Resilience.

From the Financial Times: Forecasting the World in 2025. Significant — but transitory — US tariffs are projected. (More and more and more global forecasts.) In 2008 the US National Intelligence Council released 2025: A Transformed World. In my opinion it is an even more interesting read today than then.

From the New Scientist: Global temperatures falling back below 1.5°C. “La Niña conditions are expected to lead to a slightly cooler average global surface temperature in 2025, though it does not mean the planet as a whole has stopped warming.” Recent agricultural production and consumption trends are pointing toward lower stocks, but continued incremental progress toward global food security (more).

GasBuddy is expecting, “the (US) national average for regular gas to fall to $3.22 a gallon next year. That would mark a modest decline from about $3.33 in 2024 and mark the lowest annual average since 2021.” This is consistent with EIA fuel forecasts for 2025.

According to Freightos global ocean and air shipping rates are expected to increase in 2025. “Overall, ocean rates are at least double what they were a year ago and the biggest contributing factor is the Red Sea Crisis… potential changes to de minimis rules could significantly impact air freight, especially e-commerce and fast fashion, as companies may find their goods face new fees as well as costly and time-consuming customs filings.”

The Americas Commercial Transportation (ACT) research company forecasts, “The U.S. economy is projected to grow at a moderated pace of 2.0% year-over-year in 2025, reflecting high borrowing costs and cautious consumer spending. Despite easing inflation, interest rates will continue to weigh on business investment and housing. Consumer spending, while steady, is slowing, underpinning moderate freight demand as industries adapt to a constrained growth environment… Freight demand is projected to decelerate further as retail inventory adjustments stabilize and replenishment cycles slow.”

The Conference Board anticipates, “The (US) economy should expand at an upwardly revised pace of 2.7% year-over-year in 2024 (from 2.6%) and 2.0% in 2025 (from 1.7%). US real GDP growth in 2026 should settle at its potential rate of 1.8%. Inflation is expected to stabilize at the Fed’s 2% target in Q4 2025, later than the original Q2 2025 estimate.” Goldman Sachs projects, “Consumer spending should remain the core pillar of strong (US) growth, supported both by rising real income driven by a solid labor market and by an extra boost from wealth effects…” The Congressional Budget Office (CBO) “expects the slowdown in economic growth and the rise in unemployment to lessen the demand for goods and services and contribute to a downward movement in inflation over the next three years. Measured from the fourth quarter of one calendar year to the fourth quarter of the next, inflation in the price index for personal consumption expenditures (PCE) falls from an estimated 2.5 percent in 2024 to 2.2 percent in 2025, 2.1 percent in 2026, and 2.0 percent in 2027.”

According to the Bureau of Economic Analysis, “Personal income increased $71.1 billion (0.3 percent at a monthly rate) in November. Disposable personal income (DPI)—personal income less personal current taxes—increased $61.1 billion (0.3 percent). Personal outlays—the sum of personal consumption expenditures (PCE), personal interest payments, and personal current transfer payments—increased $78.2 billion (0.4 percent) and consumer spending increased $81.3 billion (0.4 percent). Personal saving was $968.1 billion and the personal saving rate—personal saving as a percentage of disposable personal income—was 4.4 percent in November.”

Bloomberg highlighted, “Spending continues to be supported by solid earnings. Wages and salaries grew 0.6% in November, the most since March. “

Higher wages, slightly higher disposable income and spending, without much change in the savings rate — with less inflation — describes a basically healthy demand and supply context heading into year-end holidays that will skew month-to-month results.

Downstream demand capacity is good. Upstream supply capacity is well-matched to demand. Midstream capacity — still correcting itself from late-pandemic excesses — is beginning to reach equilibria. Yesterday Todd Davis at FreightWaves sent along, “Demand concerns still exist in the coming year, but the [freight] market is experiencing a strong supply side correction that will carry that momentum deep into 2025. A mild peak season with rejection rates around 9%-10% may be the best thing for the truckload market in the long run as it will tamp down any knee-jerk responses from carriers that are on the fence about deciding to leave or stay.” In other words, the quicker the weakest players leave, the better price-potentials for those remaining.

Another focused-look at food is provided in the chart below. The blue line reflects “real” — inflation-adjusted — grocery prices. In November 2019 US consumers purchased $1075.5 billion in food-at-home. Last month we bought $1171 billion in groceries. Of course the “feels like” temperature for grocery prices is much higher as shown in the red line of nominal prices. It remains mysterious to me why American consumption of food has stayed so high, well above pre-pandemic patterns even in the face of high food inflation. But the new pattern is now well-established — and reflects higher capacity demand and supply for food which enhances systemic supply chain resilience.