Category: Uncategorized

WSJ: Absenteeism hits hard

This morning’s Wall Street Journal (online) gives first position to US food supply is under pressure, from plants to store shelves.

Omicron related absenteeism is blamed. The reporters explain, “some executives say supply challenges are worse than ever. The lack of workers leaves a broader range of products in short supply, food-industry executives said, with availability sometimes changing daily.”

The story was posted on Sunday afternoon. It is a helpful summary of issues this conversation has been working through since early December.

The data is not — yet — available to confirm, but as previously noted, I expect that last week and this week are likely to give the US its thinnest flows of food. When it is worst depends on where. Each where (node or channel) depends principally on disease penetration, distance from sources, and density of wealth/population (aka demand).

There are also big differences by product category. The next few weeks consumers will be reminded that fresh strawberries (and other produce) in deepest winter is a kind of miracle. Flows of refrigerated vans from Mexico will be reduced and slowed by new vaccination requirements for truckers crossing the border.

From El Paso, Texas to Boise, Idaho many of the same variables are at play. According to one research firm, for the last two months the south central United States has experienced the most grocery stock-outs. Canada seems to be experiencing even more farm to fork disruption.

While US case counts and covid hospitalizations remain very high, over the last two weeks daily rates seem to have stopped rising. If this continues, omicron-related absenteeism should soften. There are plenty of other constraints that can complicate flows. But the system-wide pressures that have been building since early December are gradually diminishing. We should already be scanning our horizon for new threats (and acknowledging our self-created vulnerabilities).

Given the serious risks that omicron presents, I am — again — impressed by the resilience of US grocery supply chains. This is a robust demand and supply network characterized by considerable diversity. It is adaptable — even agile — in a way that reflects these structural elements. The difference is noticeable in places with less diverse, less robust structures.

This adaptability also reflects a competitive, self-actualizing culture. Last week one distribution center general manager told me something like, “You know I’m a competitive cyclist. The Super Bowl is my finish line.  Everything I’ve got is focused on what it will take to deliver that surge.  If I make our marks for Super Bowl, I win.  We all win.  No distractions.  No premature push.  No swerves. No mass sickouts between now and then. I’m going to stay in the groove for Super Bowl Sunday.”

Omicron versus hot wings? Stand-by for the February 13 contest.

George Saravelos: deferred spending

The Global Head of Foreign Exchange Research at Deutsche Bank perceives that US consumers are starting to defer spending — despite the huge piles of M2 on which this conversation has recently focused. This is a credible and important alternative view. By the end of February, data should clarify any ambivalence. The interview with Saravelos begins at the 1:11:09 mark and continues for about eight minutes.

Embedding video has not worked. Please access this hyperlink for Bloomberg Surveillance, January 21.

Still leaning into omicron

Workforce constraints caused by omicron may be peaking. There is certainly plenty of evidence for ongoing friction, but also a few signs of constraints beginning to loosen.

New covid cases continue to clock-in at a very high rate (see first chart below). The United States hopes it is following the UK’s demand curve, not Denmark’s nor Israel’s (more and more).

Proportionally, the omicron variant continues to cause fewer hospitalizations than some prior strains (see second chart below). But the number of US residents in hospital with covid has never been higher. Given several benchmarks, higher US covid hospitalizations are likely still ahead. Hospitalizations are a reasonable indicator for disease penetration of supply chains.

According to an experimental U.S. Census Bureau survey (data tables) at some point between December 29 to January 10 more than 14 million employed Americans were not working because they were infected with covid or caring for someone infected or caring for a child whose daycare or school had closed (more and more). If accurate, this is serious friction. (See another Census survey of small business for interesting angles on sectoral and geographic differentiation.)

Since omicron began its surge, more US workers have also been laid-off and applied for unemployment insurance as demand fell for several retail service categories. Last week new and continuing jobless claims saw significant increases, apparently surprising many… despite dramatically increasing case counts and reduced retail activity since Thanksgiving (more).

I have asked colleagues around the country about outcomes of omicron related workforce absenteeism. In the last couple of days three front-line folks told me:

“We are seeing flash-droughts of specific upstream SKUs. If downstream customers notice reduced flows of a category leader, the whole category will be wiped out between deliveries.  Midstream can’t overcome that kind of push-pull.”

“Denver is crazy because of the Kroger strike. The Mid-Atlantic and Upper Midwest are crazy because of winter weather. California is crazy because it’s California. Volumes are high almost everywhere. Reefer madness everywhere. There’s no fat anywhere in the system.  Add absenteeism and crazy can quickly crash.”

“The big picture is ambiguous because local conditions are highly variable.  AND that local variability (call it “diversity”) is what ‘s really keeping the whole system going.”

Given omicron’s swift success at workforce subtraction, preexisting and persisting shortfalls in the number of new truckers working, and unprecedented levels of demand (our inventory of woes could continue), the resilience of US flows can inspire awe (at least from me).

Grocery is a fast-adapting example. Stresses across the sector are real: upstream, midstream, and downstream (more and more). Individual stores and neighborhoods and therefore households are experiencing disrupted flows and increased prices. But according to credible estimates, system-wide flows are mostly fulfilling stubbornly strong demand. According to the IRI CPG Supply Index at the end of last week (January 16), overall retail grocery shelves were 89 percent fully stocked (compared to pre-pandemic benchmarks). The biggest shortfalls were in the tobacco and alcoholic beverage categories (80 and 84 percent respectively). Given this week’s turmoil, I would not be surprised if stock-outs increase by another one or even two percentage points. But there is plenty of flow to feed us, even to supply our next stiff drink.

Recent grocery flows in Australia, Canada, and China demonstrate that equally sophisticated supply chains have not been equally resilient (more).

It is waaay too soon for a conclusive assessment, much less a victory lap. But here’s my working hypothesis: scale matters, diversity matters, and adaptability — especially self-organization — matters. Where and when there is more of each variable — scale, diversity, and adaptability — there will be more resilience.

It is also essential to acknowledge that the covid crisis is disrupting our networks rather than destroying our networks. We need to be mindful transferring what covid is teaching us to the destructive context of major earthquakes, climate change, high-category hurricanes, and other network-shredding forces.

A modest decline in excess demand

The Census Bureau’s report on Advance Monthly Sales for Retail and Food Services for December showed a decline in spending from November. Friday’s related headlines were uniformly gloomy, please see here, here, and here.

CNN’s headline announced, “Warning Sign for the Economy: Consumers are Getting Grumpy.” Evidence referenced, “Americans shopped less in December, causing the first drop in retail sales since the summer. Sales dropped 1.9% compared with November, adjusted for seasonal swings.”

Many reports neglected to mention that October and November retail sales were the highest ever recorded. December 2021’s total retail sales were more than 12 percent higher than December 2020 and over 17 percent higher than pre-pandemic December 2019. (Please see chart below.)

Very strong sales persist. Given cash reserves currently available to consumers (see second chart below) a sharp decline in consumer purchases seems unlikely anytime soon.

To state what’s entirely obvious, retail sales have been unusually high since Spring 2021. This followed a collapse — and enormous shift — in demand early in the pandemic. During 2020 millions of US households — especially high-earning households — accumulated savings by spending much less. Billions of dollars were also distributed to assist millions adapt to pandemic-related economic dislocation. Starting late in the first quarter of 2021 — coincident with significant vaccination roll-outs — most households accelerated spending. But even while spending increased, the personal saving rate for current income remained well elevated until at least October (e.g., in April the PSR was 12.6, only in October did it finally fall to 7.1, much closer to the normal range of the last decade).

In most product categories, production/distribution capacity did not dramatically increase between late 2019 and mid-2021. In many cases, actual working capacity has been considerably constrained by various pandemic factors. Disequilibrium between demand and supply has often increased. Many supply chains have been increasingly stressed while trying to serve this extraordinary demand with less-than-ordinary supply capacity and volatile flows. Over the last nine months of 2021 US producer and consumer prices edged higher as lots of cash chased the same amount of goods and services.

Unusual — sometimes unpredictable — supply chain stress will persist until demand pull is better calibrated with supply push.

Leaning into the worst days

Last week grocery, pharmacy, and other retail shelves were sporadically sparse. Many workers needed to make, move, and sell products were infected with coronavirus and/or seasonal flu. Many were sick. Some stayed home to protect others.

Flows slowed in several places.

There are plenty of anecdotes of workers — some vaccinated and some not — who continue to work despite mild symptoms of something flu-like. Many have purposefully decided not to be tested. For better and worse, they have been needed to maintain flows.

This week’s product flows are likely to be even more constrained than last week — in more places. In some places, such as the mid-Atlantic and New England, winter weather will further complicate delivery of goods and services.

This week or next will probably see the worst friction for US retail supply chains since, perhaps, April 2020 (potentially as nail-biting as March 2020). Most US urban centers are likely to hit peak omicron in the next ten days. Good news: It looks like NYC and New England may already be moving off their peak.

For several months this conversation has followed case-counts and hospitalizations for the US, UK, Denmark, and Israel. Below are these “demand curves” through Saturday, January 15. The UK’s dip in case counts is encouraging. Israel’s case count is a concern (but Israel’s transmission rate has started to decline). Hospitalizations (a more confident indicator for disease penetration of supply chains) will increase following peak case-counts. Omicron’s hospitalization rate and typical clinical outcomes have, however, been much lower than prior variants.

When and where Hours-of-Service waivers, suspension of delivery curfews, and lifting of other discretionary constraints are undertaken for weather-related or other causes, it would be helpful to extend longer than normal to mitigate supply chain constraints unfolding for the remainder of January.

+++

Since early December this conversation has encouraged proactive attention to reasonably obvious implications of omicron’s contagious reach and speed. I have been pleased with many measures undertaken. In this regard, I seem to be a distinct minority. Withering criticism has been the more common response (more). Lack of clarity has been an especially prominent complaint. When possible, clarity is a distinct virtue. But pretend clarity can too often be a self-interested manipulation of reality. For me, this is a meaningful working definition of evil. Reality can be — in my experience, usually is — complex. High volume, high velocity supply chains operating in a pandemic (or on most days) are complex. Embracing this complexity is a more honest and helpful stance than willful denial. Engaging complexity favors context-aware, time-sensitive, situational, provisional, frequently contingent choices. Ambiguity can be innate. Empirically demonstrated principles can be very helpful. Actively testing principled hypotheses will often move us forward. Engaging complexity favors courage. Effectively engaging complexity favors self-critical acceptance and rapid correction of error. These are the best tools for extricating meaningful clarity from emergent complexity. Since early December opportunities to extract meaningful clarity have been sacrificed at altars of pretend clarity. I regret this outcome. It is, however, an aspect of complexity that must also be embraced.

Workforce Absenteeism

Three bits this morning from Bloomberg.  First, comments from the CEO of Albertsons.  Bloomberg reporters add:

Omicron is exacerbating disruptions in food supply chains that are already stressed. Rising U.S. infections mean more workers are getting sick at farms, factories, distributors and retailers, crimping the flow of goods to shoppers just as the variant prompts people to eat at home more.

Australia is experiencing one-fifth (or worse) higher worker absenteeismwith specific impacts on the grocery supply chain.

With the virus now raging, a key industry body is warning that firms in food and logistics are reporting 10%-50% of their workers are sick or in isolation, leaving supermarket shelves empty.

Bloomberg has run some numbers on British workplace absenteeism.  The proportion of workers not showing up spiked during the first week in January, consistent with what may have been UKs — or at least London’s — peak omicron period. 

Both Brits and Aussies test a better proportion and have had better workplace compliance with isolation and quarantine policies than the USA. So, I would anticipate US absenteeism rates could be less severe.  It is also interesting that British absenteeism in the logistics sector was lower last week than in the first week of 2021.  The dire consequences of not delivering food and other crucial freight is recognized by workers.  Logistics firms are proactive — even loss-leading — in trying to keep flows as strong as possible.

But given preexisting disequilibrium of demand and supply, it will not take much to deplete retail stocks and further slow replenishment. The Brits and Aussies are probably one to two weeks ahead of the USA in terms of peak omicron.  So… the United States is probably at least one week out, maybe a bit more, from our most constrained flows of food and more. Different US regions will be on slightly different calendars with somewhat different outcomes. There will also be flow variation in product categories.

Here’s a US focused report from the Washington Post:

In a Monday call with 27 food industry chief executives, Geoff Freeman, CEO of the industry organization Consumer Brands Association, said more employee absences were reported in the past two weeks than in all of 2020.

We have been anticipating these results since early December. In my opinion it is not too soon to implement mitigation measures that include Hours-of-Service waivers, suspension of delivery curfews, and other local and regional adjustments that can increase potential velocity of available capacity over the next two or three weeks. It is important that truck stops and rest areas continue to be operational. Supply capacity will decline as absenteeism increases.  Enhanced velocity can claw back  some of what is lost.

Record numbers

Global and US covid case counts continue to surge (see first chart below). According to Reuters, yesterday (Monday, January 10) the United States reported 1.35 million new infections. Monday counts are usually higher. The seven-day average is closer to 700,000 per day, still plenty high. Given the US testing context, even these record-high numbers are material undercounts.

US hospitalizations (a much harder number) have also hit a new high and will continue higher, exceeding the worst numbers from January 2021. Yesterday there were at least 136,604 residents of the United States hospitalized with covid (more). Some of these are not hospitalized for covid. But covid hospitalizations outside the United States (see second chart below) — and clinical challenges inside many hospitals (more) — confirm that omicron can be a serious health threat, especially for the unvaccinated. Accumulating evidence indicates that on-average omicron causes a milder version of covid. But omicron is so contagious that the numbers falling outside this average are flooding the healthcare system.

Related workplace absenteeism is increasing (more and more and more). As cases and symptoms escalate, more nurses and teachers and truckers and grocery and many other workers will become sick. The percent of cases with significant symptoms is likely to be much lower than before, but overall numbers will be as high or higher. So, flows of services and goods will slow. Shelves will not be refilled as quickly or as fully. Some nervous buying is predictable. Supply will more frequently not fulfill demand.

For how long? Please consider UK case counts on the first chart below. Counts are still high, but now declining from a peak. This mostly reflects a significant decline in metro-London’s case counts since New Year’s Eve. Some are suggesting NYC may now be approaching its peak. In much of the United States over the next two or perhaps three weeks, store shelves are likely to show symptoms of omicron.

This will be a treacherous time. Well-established, high-volume, high-velocity flows are predisposed to persist. Per evidence of the last two years, I will not bet against the creative adaptability of US supply chains. But the margin for error is as tight — probably tighter — than any period since March 2020. Local conditions, say a blizzard, week-long atmospheric river, earthquake, significant cyber-complication (you know the all-hazards drill), could suddenly transform bad into much worse.

Big Flows

Complex Adaptive Systems — like demand and supply networks — are tough to understand, impossible to precisely predict. We play probabilities and try to exploit possibilities.

Choosing our probabilities involves analysis and synthesis, data and experience, risk-avoidance and risk-taking. But reality is so super-abundant that human choice is typically radically reductionist. Some simplification is necessary. Depending on our choices (and how reality unfolds) this can be helpful or the deepest hubris. For example, last week four colleagues at the Federal Reserve Bank of New York launched a new Global Supply Chain Pressure Index (GSCPI). (More)

To avoid self-subverting choices it helps to be as clear as possible about how we try to reduce complexity. Acknowledging what is being actively (even reflexively) considered and what has been excluded facilitates self-correction. The authors of the GSCPI are explicit, “… we thus have available a data set of twenty-seven variables: the three country-specific supply chain variables for each of the economies in our sample (the euro area, China, Japan, South Korea, Taiwan, the U.K., and the U.S.), the two global shipping rates, and the four price indices summarizing airfreight costs between the U.S., Asia, and Europe.” I am looking forward to playing with and being informed by this particular reductionist angle.

I am a flows guy. My reductionist bias is to find meaningful points in the flow to monitor. I prefer discharge points, for example, volume discharged from and into ports, throughputs at manufacturing facilities, inbound and outbound from distribution centers. I find truck counts overtime on a busy Interstate fascinating. I like real-time data. I love experienced eyes-on-the-flow. I want to know someone who lives inside each flow. I want to hear what they perceive is happening.

I am more attentive to water-sheds than water-wells. I am much more an ecosystem guy than a species guy. I absolutely acknowledge the importance of each water-well and individual species (or individual product), but plenty of other folks are giving close attention to these sources. I try (and often fail) to understand wide-area interdependencies that connect tens-of-thousands of water-wells and species.

To try my best, I depend on the following indicators:

The Federal Reserve’s monthly report on Industrial Production and Capacity Utilization. I give particular attention to food and fuel figures. How do current volumes and capacity utilization compare to prior periods? For example, below is a picture of US food production compared to a 2017 base. The “total index” is suggestive (see far below). Sector-specific elements, such as for food, are even more meaningful (at least to me). Differentiating between durable and non-durable goods production has been especially meaningful during the pandemic.

The Port of Los Angeles daily/weekly report of TEU volumes received. Domestic flows are supplemented by — and often dependent upon — international flows. LA is only one port. But what happens or does not happen at LA ripples across US supply chains. Are current flows going up or down? Are flows current or is there a back-up? Is friction increasing or decreasing? Before the pandemic these data were very time-delayed. Now it is possible to have a much more current picture. There is a wide array of other maritime measures. (More)

The monthly Cass Transportation Index Report. There are a wide array of rich data angles on truck volumes and related. I am enthusiastically ecumenical in digesting as many as possible. But especially when bewitched and bewildered, I look at how the Cass Freight Index is estimating shipment volumes. Depending on what I see with trucking, I may look deeper at air and rail throughputs. (More)

The Federal Reserve’s monthly report on Manufacturers’ Shipments, Inventories, and Orders. Comparing this with production and capacity utilization (above) provides a good sense of friction in our flows, especially any sector-specific friction. For example, the 51 percent increase in November’s year-to-date shipments from petroleum refineries and 12.9 percent decrease in shipment of automobiles and 5.9 percent increase in shipments of meat, poultry, and seafood products point to important differences across the ecosystem of flows. (More)

The Bureau of Economic Analysis’ monthly report of Personal Income and Outlays. This describes demand, the consumer behavior that presumably is pulling all the foregoing. I give particular attention to the related BEA quarterly report on Real Final Sales to Domestic Purchasers. This is a reasonable expression of effectual demand being fulfilled… and it is measured in chained 2012 dollars so inflationary effects are filtered out.

Very recently I have reluctantly added attention to the Federal Reserve’s weekly report on the M2 money supply, essentially a measure of the financial liquidity available to support demand. This is an effort to 1) deal with the pandemic explosion in available cash and 2) anticipate the direction of future demand.

This leaves out a great deal. What about production capacity outside the United States? How about port throughputs on the way to LA and other US ports? Warehouse construction, workforce gyrations, technological advances, and cost/availability of capital can all have significant impacts on sector-by-sector production and fulfillment capacities. This week workforce absenteeism could have impacts for weeks to come. Obviously there is much more. Trying to reduce reality is treacherous.

But with all its limitations, regular engagement with this modest set of measures lends a sense of strategic context when rough (occasional, ephemeral, illusory?) equilibrium is punctuated by some new reality — pandemic, earthquake, hurricane, war, social evolution, cyber-something, et cetera. This water-shed view is especially valuable in making-sense of volatility… and conceiving constructive options for responding to volatility.

So… below are six sort-of current charts. Reductio ad absurdum? What do these signals suggest to you? What more do you want to know before making a judgment? What I tentatively derive is a strong sense of enormous flow emerging from a sudden collapse in Spring 2020. Current volumes are at or near prior peaks with plenty of pull still pending. Current capacity is stressed to fulfill the amazing increase in demand experienced since early 2021. Most demand is being fulfilled, but there is no substantive slack (no strategic reserve) remaining in either production or fulfillment capacities. Upstream and mid-stream are at flood stage. Downstream demand is not yet satiated. Freight is especially fraught. Implications depend on each decision-maker’s place and role in the overall system. Implications also depend on the next high impact disruption.

Sick-Call

Covid cases are climbing faster than ever before (see first chart below). These are undercounts.

While omicron-related disease is on-average less severe, its rapid simultaneous spread is finding plenty of vulnerable victims, including unvaccinated children (more). Many hospitals are packed again. Already or very soon, the January 2021 peak for covid-related US hospitalizations will be superseded (see second chart and more). Credible projections anticipate US hospitalizations will continue to increase until mid-February.

Daily deaths are also expected to increase through mid-February. As a percentage of confirmed cases or hospitalizations, deaths are likely to be well below prior peaks. But given the exponential growth in case counts, the absolute number of dead per day could close-in on the worst days of 2020.

Hospital staff, EMS professionals, food processors, flight crews, TSA screeners, and many others are calling in sick. Many more would test positive for covid, if they could find a test and were inclined to test. On January 6 Bloomberg reported, “The highly contagious omicron virus variant is disrupting already stressed food supply chains, sickening so many workers that more shortages at grocery stores are all but certain.”

Many supply chains are already constrained by a wide range of workforce dynamics (not always directly related to covid). January and February weather often complicates supply velocity in much of North America. Add a highly contagious variant into this wintry mix (and any related consumer stockpiling) and the “feels like” function for supply chains can quickly slip toward freezing. As is more widely understood today than before, high volume, high velocity demand and supply networks can be as efficient at distributing problems as products. Once bottlenecks, chokepoints, and gridlocks form, decongesting can be complicated and delayed.

On Thursday, Louisiana’s State Health Officer and Medical Director was quoted as saying, “When you’re in a surge like we are right now and Covid is everywhere — and it is everywhere right now — if you have trouble getting a test, a take-home test particularly, and you do have symptoms, the prudent thing to do is just assume you have Covid and isolate away from other people. That’s the safest thing to do right now.” This is the personal care worldview that I would want my own physician to reflect. From a supply chain perspective, I appreciate the Medical Director’s focus on people with symptoms. This is consistent with recent CDC recommendations.

But if the current exponential growth in cases continues for another 10 days or more, we will need tens-of-thousands of workers with mild symptoms to stay on the job to maintain flows of water, food, fuel, pharmaceuticals, and other critical freight on which millions depend (related). Which symptoms, how mild, with what mitigation measures? It is not too soon, actually its getting very late, to consider this treacherous possibility. Probability? The demand slopes below are not encouraging.

Do the Nosey-Pokey

Intellectually most of us accept the complexity of everyday life. Emotionally most of us prefer clarity. The tension between complexity and clarity is at the heart of most human stories — comedies and tragedies and each of our daily dramas. Integrating what we carefully discern with what we spontaneously feel and then doing something constructive can be treacherous. Below is a bit of comedy that, at least to my taste, acknowledges both what is real and our preference for something less complicated. Please listen long enough to hear Colbert sing (about 100 seconds in).