Supply Chain Resilience

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.

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 momentum… Employers 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.

Price is lower than last year, but high enough that EU demand for natural gas continues much lower than two years ago– yet is sufficient to pull LNG flows from far away to replace Russia’s flows that are now mostly gone. Matching supply and demand depends a great deal on winter weather. Temperatures are forecast to be normal to slightly above normal and even “winter as a whole is predicted likely to be warmer than average…” Below is a very helpful pipeline flow map from S&P Global with further information on floating and other flows (access link for more details).

The most recent US focused Logistics Managers’ Index (LMI) offers a potential inflection point.

In August the Logistics Manager’s Index read in at 51.2. This is a marked change for the index as before August’s reading the overall index had registered three consecutive months of contraction and five consecutive months of registering new all-time low scores. In contrast, this is the fastest rate of expansion since February. The expansion this month is driven by increased activity across all eight sub-metrics of the index. Inventory Levels are still contracting, but at a much slower rate (+6.0) than July’s reading of 41.9, which was the steepest rate of contraction in the history of the index. This has led to an increase in Inventory Costs (+8.6 to 69.1) and Warehousing Prices (+2.8 to 63.4). We also observe Transportation Utilization moving out of contraction (+8.2 to 50.0) and the rate of Transportation Price contraction slowing considerably (+7.3 to 42.9).

Will this change in direction persist?

The more expansive Global Supply Chain Pressure Index (GSCPI) — that seemed to have bottomed out in May — has spent July and August idling at almost one standard deviation below long-term-average performance. Will pressure build or leak as we head into the Northern Hemisphere’s winter?

Especially when more comprehensive measures, such as the LMI and GSCPI, are not readily coherent, I find it helpful to follow some other measures. This spring and summer I have tried to tracking the following five:

North American Agricultural Production: The September 14 USDA Wheat Outlook reports:

U.S. Hard Red Winter (HRW) exports are forecast down 10 million bushels this month to 155 million bushels, the lowest since records started in 1973/74. HRW supplies have seen a long-term downturn in U.S. acreage as corn and soy have gained acreage in many locations. At the same time, international wheat competition has surged, resulting in exports of this class being less competitive on the global market. Recently, U.S. HRW supplies have been affected by drought in consecutive years, which has dented crop prospects and contributed to exports of this class being uncompetitive with other suppliers such as Russia and the European Union (EU). Historically, HRW was the leading class of U.S. exports, but in this season, it is forecast as the third largest class of U.S. exports, being surpassed by both Hard Red Spring (HRS) and White wheat (figure 1). Production of HRS and White are down year-over-year with lower yields, but drought has not affected those classes to the same extent as HRW.

The September 12 USDA World Agricultural Supply and Demand Estimates (WASDE) reported on the wheat crop, “Supplies are projected to decline 7.2 million tons to 1,054.5 million, primarily on lower production for Australia, Canada, Argentina, and the EU, which is only partly offset by an increase for Ukraine. If realized, this would be the first year-to-year decline in global wheat production since 2018/19. Australia is reduced 3.0 million tons to 26.0 million as dry weather this past month in Western Australia, New South Wales, and Queensland lowers yield prospects. Canada is decreased 2.0 million tons to 31.0 million on the initial model-based forecast by Statistics Canada for the 2023/24 crop, indicating lower yields from last year arising from dry conditions across the Prairies.” (More and more and more).

Global Natural Gas Demand and Supply: US domestic and export flows have been strong, at least prior to last week’s problems at the Freeport LNG terminal (more and more ). US exports combined with with outbound flows from Norway, Qatar, and Algeria have been sufficient to ameliorate recent concerns regarding Australia’s LNG exports. But Freeport’s troubles coinciding with Australia’s labor issues (and more) contributed to last week’s upward movement in the benchmark EU natural gas price. According to CNBC, Ana Maria Jaller-Makarewicz, energy analyst at the Institute for Energy Economics and Financial Analysis offered, “Gas markets are becoming riskier — gas and LNG prices are increasingly volatile and greatly affected by global factors… The uncertainty of future events that could affect gas supply makes it extremely difficult to predict how the supply and demand could be balanced and how much prices could escalate by. As seen in last year’s events in Europe, the only way that importing countries can mitigate that risk is by reducing their internal consumption.” In most of the EU demand and consumption of natural gas has been reduced by almost one-fifth multi-year averages. According to Reuters, “Gas imports into Germany dropped 17.9% year-on-year in January-August 2023…” Conservation has combined with a slowed economy to constrain natural gas consumption. In East Asia demand has been “tepid” for most of this year. US demand for natural gas has, however, been record-setting, largely due to electric power sector consumption in response to record summer heat.

China Export Volumes and Value: The Wall Street Journal reports that when valued in US dollars, “China’s outbound shipments declined 8.8% in August from a year earlier, China’s General Administration of Customs said Thursday [September 7]. The reading narrowed from the 14.5% year-over-year drop in exports in July, which marked the worst such result since February 2020.” (More and more). In July Mexico replaced China as the largest source of US imported goods. This reflects a sustained decline in US-China bilateral trade and shifts in China’s outbound velocity. The ASEAN region now claims more of total China trade (imports and exports) than either the United States or European Union. For August 2023 China’s dollar-valued exports to the US totaled $45,032 million, exports to ASEAN totaled $42,866 million, and exports to the EU $41,295 million. The South China Morning Post reports, “While China has long been Asean’s biggest trading partner, Asean only became China’s biggest trading partner in 2020 – filling a position long held by the US. Since 2018, when the trade war broke out between the world’s two biggest economies, changes in the supply chain have seen Beijing step up trade with its neighbours as manufacturers shifted from China to Asean countries. China-Asean bilateral trade grew from US$641.5 billion in 2019 to US$975.3 billion in 2022” (more and more). Bloomberg reports, “… parts sourced from China are increasingly moving to Southeast Asia for final assembly before being exported to the rest of the world…”

North American Grid Capacity: In early Spring this measure was selected because of concerns for getting through the Summer without major grid failures. We have had too many close calls (here and here and here), but the near-term worst is now probably behind us and longer-term trends are encouraging. The strategic risk involves 1) demand-spikes from extreme weather, especially in places with 2) rapidly increasing long-term core-demand where local generation capacity is challenged to grow fast enough, and 3) the ability when necessary to complement local generation capacity with effective transmission of wider-area — even continental — generating capacity. Wherever two or three of these factors gather together problems can (too) quickly trip into crisis. Extreme winter weather will increase prospects for this three-headed hydra. These risks are likely to persist for at least another decade in places with rapid population growth. But the North American grid is also experiencing significant capacity upgrades (here and here and here). But the transmission network to deliver this new capacity to demand is not expanding quite as quickly (here and here and here). The next few years will be dicey, but the problems are finally widely recognized, significant investments are being made, and — maybe — a shared sense of practical urgency has emerged (here and here and even here at this blog).

US Personal Consumption Expenditures: At the end of August the Bureau of Economic Analysis gave us this angle on July economic activity: personal income increased $45.0 billion (0.2 percent at a monthly rate). Disposable personal income (personal income less personal current taxes) increased $7.3 billion (less than 0.1 percent). Personal consumption expenditures (not inflation-adjusted) increased $144.6 billion (0.8 percent), see chart below. This level of spending generates strong corporate balance sheets, but over time has the opposite effect on personal financial conditions. Pandemic-related forced savings and wage increases have fueled several months of increased personal expenditures but the surplus is almost gone (here and here). How quickly and how much this pull will shift is now a crucial question. Will wages leap higher? If so, how much will inflation eat away the increase? Or how many jobs will be lost as interest rates rise to dampen inflation? If fuel costs continue to increase (see above) this will increase costs and prices across sectors. How will PCE adapt? Who will win? Who will lose? How will push respond to these changes in pull?

With many local exceptions, it seems to me that push and pull have been basically in balance for most of this year. Despite droughts, war, and more, food remains abundant — if a bit less abundant than in some prior years. For most of the last year global energy stocks have also been abundant, more abundant than reasonably feared, and prices have been moderate. There are now increasing pressures — some intentional and some not at all — to constrain energy flows in a manner that tends to increase prices. Marginally increased prices for fuel, food, and more have, so far, softened demand more successfully than spurred increased wages. In the late-pandemic period and since, European and East Asian consumers have been restrained. Even US consumers have reduced their rate of increased spending when adjusted for inflation (see red line in chart below). Upstream production capacity has mostly been preserved (and even expanded), but actual push has slowed to better match current pull. This balance can be treacherous in case of any sudden, unexpected spike in demand or when midstream channels are insufficient (e.g., Panama Canal or the grid’s transmission network) or when a significant upstream source is taken offline (e.g., LNG terminals or a failed harvest).

How this balance might shift in the final quarter of 2023 is not obvious to me. I can make contending arguments. But in terms of current fitness, I perceive that global supply chains are in healthy shape for the start of the Northern Hemisphere’s winter.

Overnight the United Auto Workers initiated walk-outs at assembly plants operated by Ford in Wayne, Michigan by GM in Wentzville, Missouri and by Stellantis’ Jeep brand in Toledo, Ohio (more and more). The walk-outs involve 12,700 workers out of a total UAW Big 3 membership of almost 150,000. According to Reuters, this job action “will halt production of the Ford Bronco, Jeep Wrangler and Chevrolet Colorado pickup truck, along with other popular models.”

This is a surgical strike intended to maximize Big 3 pain while minimizing the proportion of UAW members hurt (and draw-downs on the UAW strike fund.) The vehicles no longer being produced are among the most profitable in each company’s line-up. This reflects a sophisticated understanding of the auto industry’s value-chain as well as its supply chain.

As this blog often notes, contemporary high volume, high velocity (and high value) supply chains tend to be highly concentrated. When these capacity concentrations are hit hard — intentionally or not — there is an amplified effect. Supply Chain Resilience attempts to identify these “targets” and reduce systemic vulnerability. It appears that the UAW has conducted similar analyses to exploit Big 3 vulnerabilities in a way that requires the least cost to the UAW.

Much smarter than any hurricane.

+++

September 19, Update: Bloomberg has a Big Take on the strike entitled, How Auto Executives Misread the UAW Ahead of Historic Strike. The story highlights personal tensions between UAW President Shawn Fain and auto industry leaders. The Bloomberg narrative prompted bad old memories.

From late 1979 into early 1980, I was part of a crisis communications team consulting with International Harvester — then among the top ten largest US companies — as it “negotiated” a new contract with the United Auto Workers. I was not involved with IH prior to the UAW beginning strike action, but it is my impression that IH senior management anticipated, even welcomed, the strike as a means to wrangle substantial salary concessions from their employees.

Archie McCardle, CEO of International Harvester, was two years into a major restructuring of the company. He envisioned a radical reordering of corporate objectives and behavior calibrated to increasing global competition and post-OPEC economic realities. Especially in retrospect, it was a smart strategy. McCardle and the Board were working to proactively manage seismic changes that did reshape the global economy during the last quarter of the Twentieth Century.

Many labor-management structures that made sense in the 1960s were unsustainable by the 1980s. But while most US corporations (and even some labor unions) recognized this reality, cost-containment and incremental streamlining became the typical transition path. Instead McCardle insisted on radical, arguably rational reductions in labor costs and much more agility to deploy labor assets.

McCardle came to see the UAW as an existential threat to his strategic vision. I’m not sure this was his position at the beginning of the strike, but by Christmas 1979 McCardle had become a wanna-be Union Buster. He despised Union leaders. The feeling was soon mutual. In meeting after meeting I watched predictable — thereby manageable — disagreements descend into fever-dreams of mutual destruction. I also came to perceive my client, Mr. McCardle in particular, as the principal aggressor. There was bad behavior on all sides. There were also opportunities to defuse the conflict that Mr. McCardle used to escalate tensions. I resigned my modest role sometime in late February.

The cascading financial consequences of the 172-day strike essentially destroyed International Harvester… and the lives of many employees.

This is not — thank goodness — a perfect analogy for the current UAW strike. The Big 3 have offered more not less. Mr. McCardle was an unusually abundant source of arrogance, disdain, and aggression. Yet I expect arrogance is at play today, the Bloomberg piece offers some evidence. I am certain the automobile industry — and the global economy — is in the midst of a fundamental inflection point. These transitions are always treacherous. When any of us feel under attack, rationality can be an early casualty.

Supply chains are sometimes called socio-technical systems. Vast flows of digital signals now communicate precise measures of demand velocity. Pallets are planned by algorithms and sometimes picked by robots. In the last half-century technological change has fundamentally altered the relationship of demand and supply. The technologies of the last thirty years have accelerated this revolutionary change. Today’s technology is supercharging change.

But again and again those of us inside the system encounter the deeply human, profoundly social character of the network. Every minute choices made by just one person speed or impede flow. Our technologies tend to be linear, while reality is usually not. Human relationships inform and shape flows in ways that, so far, our technologies do not anticipate or stupidly over-estimate. CEOs meet and do deals when personalities mesh as well as their spreadsheets. What looks great on paper explodes when personalities clash. Progress is often the product of mutual restraint.

Many of us have been on a dock or in a fulfillment center or on a production line that is humming happily and experienced the ugly results when that hum is replaced by congestion, collisions, shouts, and excuses. In either case technology is seldom the principal cause. Technology usually amplifies social content and context.

Today the UAW and the Big 3 are engaged in deciding how a big part of our world will behave going forward. This task is tough enough even if union and company leadership behave themselves. The more they behave badly, the more likely bad results for everyone.

September 26 Update: Late last week Ben Cohen at the Wall Street Journal explained how the current UAW strike strategy is related to a 1990s strike by flight attendants against Alaska Airlines. The playbook for that labor action was named Create Havoc Around Our System (Chaos). Great acronym. Very accurate use of “system” (from Ancient Greek σύστημα (sústēma, “musical scale; organized body; whole made of several parts or members”), from σῠνίστημῐ (sunístēmi, “to combine, organize”) + -μᾰ (-ma, resultative suffix). σῠνίστημῐ is from σῠν- (sun-, “with, together”) + ἵστημι (hístēmi, “to stand”), from Proto-Indo-European *steh₂- (“to stand (up)”)

The UAW’s labor action — like the Association of Flight Attendants’ approach before it — is targeting core characteristics of each sector’s system service levels. Cohen wrote, “Both are meant to sow confusion, keep companies guessing and paralyze interconnected systems. Both amplify uncertainty and create opportunities for mistakes that the union can exploit.”

By intentionally — strategically — striking some places and not others a comparably few strikers can have a cascading systemic effect. The UAW’s recent escalation of strike action against General Motors and Stellantis (but not Ford) increased the number of strike venues and shifted from upstream vehicle manufacturing to midstream parts distribution (more and more and more). Hits to the midstream will accelerate downstream impacts and distress.

Airlines are even more networked than automobiles, but especially in the last twenty years the US automotive industry has sufficiently streamlined and concentrated its network topology (more) that it is much more efficient on most days and much more vulnerable to hard-hits in the wrong-places on bad days.

The UAW calls this their “Stand Up Strike.” This is intended to recall successful “Sit Down Strikes” of the 1930s. It is also — no doubt unintentionally — an etymologically accurate description of intentional targeting of capacity concentrations.