Category: Uncategorized

Demand AND Inventories Increase

Posted on by Philip J Palin

American consumers spent much more in January than ever before. According to the Federal Reserve (see first chart below), November’s previous record was $569,560 million. January retail spending was $577, 740 million for what is usually a comparatively slow month.

For good reasons, commercial enterprises, economists, politicians, and many more prefer strong US consumer spending. But from a supply chain perspective, this persisting pattern of very high demand has been problematic. We have essentially been on flood-watch — and taking flood mitigation measures — for most of the last year.

New data, however, also offers some tantalizing evidence that the adaptability and creativity of these mitigation measures may be paying-off (more and more and more). In December we also saw a significant increase in inventories (see second chart below). If we can continue to build inventories, then by summer the disequilibrium of supply and demand could be significantly reduced in most product categories. At the end of 2021 we were at an overall inventory-to-sales ratio of 1.16 (up from 1.07 to 1.08 for most of 2021). A ratio closer to 1.4 has been historically healthy.

The January Producers Price Index can also be read to suggest strong upstream behavior to fulfill anticipated strong downstream demand. (Less sanguine readings are also possible, but this morning I am apparently positively inclined.)

Next Tuesday, February 22, there will be an update on the M2 money supply for the month of January. The last week in December reported a (recently) rare softening in the ultra-high supplies of cash available. If there has been continued gradual softening over most of January, I would take this as good news. From a supply chain perspective, if there is strong demand (sales) and there is reasonable evidence that strong demand can persist (cash reserves available to consumers) and inventories are being rebuilt, then our networks are moving toward a more sustainable, predictable, much less volatile flow pattern.

Omicron absences

Posted on by Philip J Palin

The Bureau of Labor Statistics reports that in mid-January US workforce absenteeism surged on January 19-20 (see chart below). Last month had overall rates of absenteeism higher than any time since last summer’s Delta surge and is the worst month for January absenteeism on record with 2 to 3 million more employed people not at work in the first month of the year than in non-pandemic years. January’s 7.6 million employed people not working is, however, much less than the pandemic peak of 11.5 million in April 2020. Average monthly absenteeism in 2019 was about 5.3 million workers.

BLS surveys found extended illness caused more absenteeism than usual. According to Bloomberg, “The 2.3% of employed Americans not at work because they were ill for the entire mid-January jobs survey reference week was the highest such percentage since the Bureau of Labor Statistics started keeping track in 1976, and by far the highest in recent years.” Childcare complications also contributed, especially on January 20 and later. Data is still being crunched for the last week in January, but trends suggest personal illness continued to climb as the cause of not going to work.

I was worried that omicron-related absenteeism would be higher and extend longer. I was especially watching grocery flows, which seemed to experience the most absenteeism (and/or other stresses) between about January 12 and 19. From soft-soundings (even less rigorous than “qualitative data”) it is my impression that many workers were probably infected with mild symptoms and still came to work — sometimes because they perceived they were especially needed. Justin Fox at Bloomberg offers other reasons.

While stock-outs did increase during January’s second-half, grocery flows were well above 80 percent in every category and every region even in the face of strong demand. Another example of profound resilience or another bullet-dodged? Probably some of each.

Covid Demand Curves

Posted on by Philip J Palin

Since last summer this conversation has used comparative change in covid hospitalizations to assess the demand implications of the pandemic. I treat hospitalizations as the most consequential “pull” factor — certainly on the health care system, but also on economic life. Hospitalization is also a leading indicator for deaths.

I have focused on four demand curves: United States, United Kingdom, Denmark, and Israel. I live in the United States as do most of my readers. The other three nations have health surveillance systems considerably more comprehensive and integrated than the United States. So far in the pandemic, one or more of these three nations has served as an accurate bellwether of where demand curves in the United States (and elsewhere) will go in another few weeks.

Below is the comparison as of February 13 (and over the last twelve months). All four nations currently have some of the highest hospitalization counts since the pandemic started. Three of four, however, appear to be undergoing a sustained reduction in hospitalizations. The fourth, Denmark, still has increasing hospitalizations, but has decided there is sufficient health-care supply for the current level of demand. The omicron wave has killed tens-of-thousands, but has also presented a less deadly proportional threat per total transmissions. Most nations now report declines in hospitalizations. But Denmark is not alone, Japan is now at least seven weeks into a surge of covid cases and hospitalizations.

What comes next with covid is unknown. Vaccinations and prior infections are constraining viral effects. Improved therapeutics are reducing morbidity and death. Mutation is ongoing. History demonstrates that pandemics can persist or recur for decades. The context for covid is unprecedented. The global population for the 1918 pandemic was less than 2 billion. There were still fewer than 3 billion for the 1957 pandemic. There are now about 8 billion people and we are much more mobile than ever before. Humans now provide much higher potential velocity for mutations and infections.

We are probably conditioned by evolution to discount risks that are less than imminent. So, as the most recent covid wave fades (slightly, per the chart below), there is clearly a desire to “get-back-to-normal.” This preference is understandable and related behavior can even be constructive. As a mind-set or risk-management strategy, however, such preferences are at least premature and potentially dangerous.

Here’s just one scenario that suggests remaining vigilant: The comparative success of China’s zero-covid strategy (more and more) could, paradoxically, increase its vulnerability to future coronavirus mutations. Given the size of China’s population and the key role the nation plays in the global economy, what goes wrong in China does not stay there.

CPI: Tug of War

Posted on by Philip J Palin

The Wall Street Journal headline and sub-head tell the story:

US inflation rate accelerates to a 40-year high of 7.5%: Strong consumer demand and pandemic-related supply constraints continued to push up prices in January.

In January the overall Consumer Price Index (see chart below) demonstrated an accelerating rate of change not seen for a generation.

The volatile food and fuel categories were up again.

Food prices surged 7%, the sharpest rise since 1981. Restaurant prices rose by the most since the early 1980s, pushed up by an 8% jump in fast-food prices from a year earlier. Grocery prices increased 7.4%… Energy prices rose 27%, easing from November’s peak of 33.3%, but a jump in electricity costs was particularly sharp when compared with historical trends.

The Bureau of Labor Statistics provides details on price increases by category. Meat price increases have been a major contributor to overall increases in the food index (12.2 percent January to January for the meats, poultry, fish category).  But there is considerable variation by category.  For example, uncooked beef roasts have increased 19.2 percent while frankfurters have increased 2.1 percent.  Fresh fish and seafood have increased 12.7 percent while shelf-stable (usually canned) seafood has increased 0.8 percent. 

As I scan the variation within several food categories, I wonder – hypothesize – about the cost differentiation in terms of “industrial” versus “craft” processing and merchandising.  More craft-oriented approaches require more workforce investment at a time when covid-related absenteeism has been disruptive and labor markets have been volatile.

Both used and new cars have experienced significant price increases due to both high demand and constrained supply. New cars and trucks cost about 12 percent more than one year ago. Used vehicles are up 40 percent. Car and truck rentals are up almost 30 percent. Housing rent is up over 4 percent. Increases for most of the measured categories are running at four percent or less. But there are enough categories with much higher increases to drag the average for “core inflation” to 6 percent since January 2021.

Petroleum prices have a significant spill-over on fuel, chemicals, fertilizer, plastics, and freight costs. A tight labor market is generating wage increases. As noted again and again, there continues to be plenty of money in the pockets of millions to support high levels of demand. I don’t anticipate demand growth ahead. It is already plenty high. But I do expect demand to become more evenly distributed across sectors and categories. Can core inflation be tamed — to something under 4 percent per annum — by more balanced consumption? Will pent up demand (and available cash) continue to support high employment and even some wage gains? How much push? How much pull?

Semiconductors and the digital dance

Posted on by Philip J Palin

The world is not making enough semiconductors to fulfill demand. The disequilibrium of supply and demand is especially troublesome in certain categories. While usually skeptical of “shortage” talk, I recently acknowledged that current automotive production is constrained by a shortage in supply of legacy semiconductors.

But step just a bit upstream from the inventory bins of automotive manufacturers and the demand aspect of this shortage emerges. (Good overview.)

In spring 2020 many automobile manufacturers anticipating sales would crater canceled existing orders for semiconductors. Freed from this commitment to lower margin products, semiconductor manufacturers converted production to higher-margin categories… at the front end of a surge in demand for higher-end categories that started in the second-half of 2020. Automobile manufacturers gave away their place in line.

Since 2020 demand for all-things-digital — and therefore the semiconductor muscles of the digital dance — has done nothing but grow. To reclaim the parts they need, automobile manufacturers are paying more and developing creative work-arounds.

The fundamental challenge, it seems to me, is to reclaim time and space for automobile chips in an ecosystem where demand-pull is surging and supply-push is expensive and time-consuming to grow. Semiconductor manufacturers are expanding capacity. But in the meantime choices are being made about how to maximize current returns and longer-term strategic advantage.

Tuesday GlobalFoundries (one of the planet’s top-five manufacturers of semiconductors) released its 2021 fourth quarter financial results. For the full calendar year shipments were up 17 percent. Revenue was up 36 percent. Implying the ferocity of demand? Two other bits from the report are explicit regarding demand dynamics:

GF entered into 30 significant long-term customer agreements that provide assurance to our customers and provide revenue visibility to GF.

GF and Ford announced a non-binding strategic collaboration to advance semiconductor manufacturing and technology development within the US, aiming to boost chip supplies for Ford and the US auto industry. (more)

When there is a pinch, where do you suppose supply will flow — toward “long-term customer agreements” or “non-binding strategic collaboration”?

Supply organizes around demand.

Maersk perceives smoother sailing ahead

Posted on by Philip J Palin

Early this morning (Danish time) A.P. Moller-Maersk, the global shipping giant, released its annual report and 2021 fourth quarter flash summary. Most of the headlines (more and more) point to supply chains “easing” and even normalizing over the course of 2022.

Here are excerpts from page 15 of the annual report, starting with a retrospective on the 2021 market:

Consumer demand for goods was supported by economic policy and the ability to make purchases online, while services demand such as tourism and restaurants remained subdued in the first half of the year. At the same time, the supply side of the logistics industry continued to be disrupted by COVID-19 and capacity shortages, where container availability and air capacity remained tight, and wait times for vessels outside of ports remained lengthy given the bottlenecks in landside transportation and warehousing. Strong demand combined with supply shortages led to sharp increases in cost of logistics services…

That summary of the past year’s outcomes contrasts with a much less confident anticipation of the year ahead:

Going forward, the global growth outlook remains strong for 2022, led by expectations of robust business investments, strong demand, rising wages and relatively cheap capital. Moreover, inventory replenishment will support goods trade well into 2022, and the channel shift to e-commerce is likely to persist. But risks to the outlook are increasing, most clearly for China and Brazil, and with headwinds building for the USA and European consumer. It is highly uncertain if goods consumption will continue to drive up container demand. In the USA, consensus forecasters project fairly flat consumption profiles from current high levels. Purchasing Managers Index (PMI) is also softening in key countries, and the fiscal impulse will start to turn negative in 2022 in many economies. Finally, households’ appetite for services, such as travelling, could begin to take up a larger share of the wallet than usual if the pandemic dissipates during 2022, and the degree of e-commerce penetration remains to be seen.

If goods consumption declines — either from overall diminished consumption or due to a shift in proportional demand for services — then supply chain congestion should dissipate (disappear?). Maersk expects demand to be more evenly distributed across time and product lines by the second half of 2022.

And, of course, risks persist.

Velocity of stuff (and money and pull and push and the ever-changing flux of flow)

Posted on by Philip J Palin

On January 7 President Biden argued for a crucial policy distinction:

If car prices are too high right now, there are two solutions: You increase the supply of cars by making more of them, or you reduce demand for cars by making Americans poorer.  That’s the choice.

Given our current context, the President might have said: you increase the supply of cars by making more legacy semiconductors or…

But point made and point taken. There is a place for boldfaced claims.

There is also a place for more nuanced understanding. Recent price increases — especially boldfaced price increases — reflect a messy collision of increased demand, shifting demand, and a wide range of supply issues, including long-standing capacity constraints as well as more recent production disruptions, freight congestion, and workforce limitations (often tied to covid).

There is much more money available to US consumers than typical. In the first week of January 2020, the M2 money supply in the United States was $15,504 billion. In the first week of January 2022 there was $21,845 billion available. (See chart below.) That is close to 30 percent extra liquidity.

During the pandemic, flux in supply has been very uneven, but in terms of overall proportions, supplies of goods and services have not increased anywhere close to 30 percent. Real GDP per capita increased less than 3 percent from Q4 2019 to Q4 2021. The Federal Reserve tries to measure changes in manufacturing output per job. Where 2012 output per job equals 100, the Q4 2019 level was 94.5. The Q4 2021 level was 98.

The supply of money has grown much faster than the supply of stuff (and even faster compared to reductions in many services).

This increased supply of money reflects (in part) a significant reduction in velocity of the money supply. During 2020 many Americans saved much more than usual. Not spending on travel, eating-out, entertainment, and more has slowed and pooled money flows. In early 2021 some of this savings began to be spent — and expenditure of current income returned to pre-pandemic patterns. But for millions of consumers, billions of unspent dollars have, so-far, mostly stayed in their pockets.

As demonstrated in the chart below, the speed with which money is used to buy stuff (blue line) has declined precipitously over the last quarter-century. During the pandemic many Americans further slowed their transaction pace. The turnover rate of money is now about half what it was in the mid-1990s.

As the red line on the chart above suggests, velocity of the money supply has declined as US income inequality has increased. The pandemic (once again) has amplified a preexisting trend. The Gini Index (here and here) works to measure the population-wide dispersion of income as more or less proportionally equal. I read the chart immediately above to say that since the great recession (2008), the proportion of people who can afford not to spend their available cash has increased substantially. Roughly one-third of US households live paycheck-to-paycheck (supporting higher velocity of money). But for another quarter to one-third of households, a significant proportion of cash-on-hand is not immediately needed (here and here and here).

Retail sales have recovered and in some categories much more than recovered. But given cash available, demand has arguably been restrained. Even Amazon is reporting much slower revenue growth. Given velocity of the money supply, it is even possible to say that spending has been sluggish.

In some cases, new cars for example, the sales slowdown is clearly the result of supply constraints. Manufacturers have not been able to build as many cars as consumers want because of a collapse in the supply chain for particular types of semiconductors. Before the pandemic more than 17 million new cars were sold most months. Since March 2020 this sales threshold has been achieved only three times. In September 2021 fewer than 13 million new cars were sold. In December 2021 barely 13.5 million.

Some smart market participants are joining President Biden in pointing to supply now being the core problem. A January report from BlackRock argues:

The start of the pandemic was dominated by an economy-wide supply shock: activity was deliberately brought to a halt to curb the spread of the virus. As restrictions were lifted and the powerful restart took hold, it proved difficult to bring production back online as quickly. Through 2021 the restart saw the emergence of more sector-specific supply problems, driven by the sudden and sharp shift in consumer spending away from services and towards goods. This shift in the mix of demand created bottlenecks in goods-producing sectors as supply struggled to keep pace. Meanwhile, it created spare capacity in service industries. This has driven inflationary pressure in goods sectors, which have seen the largest price rises… Pricing pressures have been most acute in sectors that have been particularly affected by bottlenecks, such as autos. This explains why there is so much inflation overall even though economies have yet to reach full employment.

I agree with the foregoing. But the team at BlackRock then tries to argue away the role of demand, extraordinary growth in the money supply, and the proportional slowdown in transactions. They conclude, “inflation is being and will continue to be driven more by limits on supply capacity than excessive demand pressure.”

Disequilibrium of demand and supply always reflects an interaction of pull and push. The classic Beer Game exposes perpetual impacts of (mis)perception on both push and pull. Network science demonstrates the stigmergic disposition of social behavior where feedback pulls action that pushes more feedback that prompts more action. Evidence accumulates that for equilibrium to (re)emerge systems self-organize around an attractor. BlackRock has evidently decided supply is the key attractor to resolve our current disequilibrium.

BlackRock is not alone in this inclination. Larry Summers recently wrote that over the last year many policy-makers have, “failed to appreciate just how quickly the economy could shift from being demand-constrained to supply-constrained.” In recent days both Bloomberg and the New York Times have focused on supply constraints as the premier economic challenge. Last week the International Monetary Fund’s World Economic Outlook for 2022 highlighted many supply constraints and said very little about demand dynamics.

I certainly recognize real and stubborn constraints in supply capacity. No serious person is suggesting a strict either/or. Reducing supply frictions and shaping demand behavior both need to be on the policy tool belt. But simultaneously attending to each often requires trade-offs. Which factor, push or pull, is given policy priority will have consequences.

I remain skeptical that even if most supply problems were solved this would move us closer to equilibrium. In my experience (and understanding of theory) supply organizes around demand. If supply functions and flows were magically elastic — given current liquidity levels, inflation would probably be even stronger. Until demand stops pulling quite as hard, streams of supply will continue to be crowded and choppy. Push capacity added to fulfill recent demand will be shed once demand diminishes.

In December 2019 US retail sales were $529.6 billion (November: $527.8) Supply and demand were perceived to be in rough equilibrium. For December 2021 US retail sales were $626.8 billion (November: $639.1 billion). Even after subtracting for inflation, demand was pulling at least one-fifth more. This caused serious disequilibrium. What’s really amazing is how well supply chains have fulfilled this huge surge.

Late in 2020’s first quarter and continuing into the second quarter there was evidence for a demand constrained economy. But since the second half of the first pandemic year and especially since March 2021 the United States has been navigating a demand inflamed economy. Demand dramatically dropped in some categories and migrated, often promiscuously, to other categories. These volatile shifts in pull have challenged production and distribution capacities spawning congestion, especially at places where many flows intersect such as seaports and distribution centers. As if these covid-related demand gyrations were not bad enough, the pandemic has also pinched push capacity, especially by rather randomly reducing workforce participation and productivity.

Automobile manufacturing has been supply constrained. Mitigating the semiconductor shortage will increase supplies and, eventually, moderate price-increases. More spending on cars will redirect consumption from other product categories. This will mitigate some demand inflammation. In January 2022 three million more vehicles were sold than in December. At least two million more per month need to be sold before the new car market is better balanced with potential demand, but the current direction is encouraging.

The personal saving rate, at 7.9 percent, is now much more inline with historical patterns. In December 2021 disposable income remained about four percent higher than December 2019. This is, however, a soft glow compared to the raging fire of 23 percent higher in March 2021 compared to March 2019. That level of inflamed demand self-immolates supply capacity.

Especially as spending on services, entertainment, travel and such has recovered, accumulated savings is being gradually spent down (e.g., December 2021 spending at food and drinking establishments was almost one-third higher than in 2020. For all of 2021 eating and drinking out was about six percent higher than for all of 2019). Savings accumulated by high-earners is beginning to circulate in the economy again.

At the end of December the M2 money supply (first chart above) was almost one-third above 2019’s close. This is, in my opinion, too much gain too fast. This sharp increase in implied demand exceeds the adaptive capacity of most mature supply chains. (Skepticism regarding this level of demand persisting also discourages adaptation.) M2’s rate of growth has started to slow. Increased velocity of the money supply could appear soon, if people and their money can continue to circulate more and more.

Fiscal and monetary policy makers are being encouraged to navigate an economic “soft landing” where interest rates and other tools are deployed to brake inflation without prompting high unemployment (here and here and here). There is growing concern that supply chain bottlenecks and related problems will buffet the runway, threatening a crash landing. China’s zero-covid strategy has (and will) cause stop-and-go upstream congestion. But more even flows can be consciously cultivated.

To facilitate less friction in flows, the swollen M2 money supply needs to be consistently and gradually pumped into the economy, preferably into sectors, such as automobiles and travel, that have seen less than their typical share. This will reduce “excess demand” for other categories, mitigating stress on midstream and upstream sources serving those categories. Diversification (de-concentration) of demand will reduce physical congestion across supply chains. As congestion is reduced, supply chain assets (e.g., dock velocity, truckers and trucks) can be more effectively deployed. Inventories can be rebuilt. As M2’s current excess supply is reduced, pull-capacity will be better balanced with push-capacity and a rough equilibrium of demand and supply can be reestablished.

Rather than a soft-landing analogy, I prefer an aerial refueling analogy. The United States wants/needs its economy to continue at close to current speed and altitude. We want to avoid a forced-landing. We would prefer that recent inflammation not become long-term inflation. Stable prices with maximum sustainable employment is where we want to go. Our huge reserves of M2 are important sources for fueling this flight. Price increases add friction. Cash in our pockets lubricates.

Safe and effective aerial refueling requires careful calibration of source with receiver and a continuous link. Covid is a potential complication, but our recent experience with omicron may suggest that demand and supply networks have figured out how to calibrate even with considerable cross-winds.

Pent-up (at times premature) demand for post-pandemic lifestyles should continue to calibrate (and accelerate) M2s velocity. The greater challenge is consistently delivering this fuel to sectors and categories where it is needed most — to recover dormant supply capacity rather than inflame already strained capacity (here and here and here and here). Mindful targeting matters, as usual.

If prices are too high right now, there is a solution. Reduce demand where supply capacity is insufficient and increase demand where supply capacity is available.

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February 8 Afterword: As previously noted, I have been very reluctant to give significant attention to the M2 money supply in my ongoing effort to understand Supply Chain Resilience. Measuring the money supply — especially the supply of US dollars — is like measuring raindrops. But given my perception of demand’s substantive influence on supply — and the recent extraordinary growth of M2 (even if imprecisely measured) — I have decided that ignoring M2 can no longer be justified. It is worth noting that I am working with the scope and scale of M2 to decipher the pull of demand on the supply chain’s push-capacity. I am not trying to claim or predict how M2 causes inflation. There is a difference between demand surges and swerves causing perturbations in the flow of goods and services and the role of M2 in the Consumer Price Index. Smart folks can disagree on how M2 and inflation are related (or not). In any case, discerning inflation, per se, is not my purpose. Discerning potential patterns — and especially preferential attachments — in the complex adaptive system of global flows of goods and services is my purpose. For my purposes, M2 is very rough but — especially given its recent behavior and enormous size — I hypothesize M2 does influence demand and, therefore, supply. I am still working through how, when, and why.

Success (or avoiding the worst)

Posted on by Philip J Palin

[Updates through February 17 are included below.] The US grocery supply chain continued to deliver most of what was wanted to most consumers in most places through the worst of omicron. There was significant employee absenteeism. There was increased friction in several flows. Some shelves were empty. Velocity was highly variable depending on day and place, but overall volumes were close to 90 percent of typical.

I may never see data that will confidently confirm or deny, but based on a small amount of quantitative data (mostly IRI and Federal Reserve) and what folks with eyes and ears on food flows tell me, I now perceive that grocery supply was probably most mismatched with demand between about January 12 and 19. There was (is) considerable regional/local variation. Less populated, less wealthy places farther away from grocery distribution centers generally had more stock-outs.

Demand was higher than January 2020. Depending on product category, demand was six (produce) to thirteen (bakery) percent higher.

There were (and are) sourcing and production problems. Food processors saw a significant increase in worker absenteeism. Trucking, already substantially over-subscribed, had its share of sick drivers. There were also increased delays in loading and delivering groceries because of lack of personnel on both ends of this flow.

It is my strong impression that there has been more product available than the ability to move product. This friction exists across the whole network, but has been especially difficult between distribution centers and retail outlets. Distance and square footage of moving stock is a (mostly) fixed constraint on push. But in mid-January cycle times for operating vans were extended as it took much more time to load and unload. Then add six to thirteen percent increased pull. Faster pull + slower push = more empty slots on shelves. [This bottlenecking of midstream to downstream is a recurring characteristic of network friction well beyond groceries-in-a-pandemic.]

If you have been reading this space since early December, you know I was concerned about the potential for the grocery network in some major trading area(s) suddenly shutting down (here and here). This did not happen.

Flows persisted because consumer-pull did not experience a sustained sharp-surge (e.g., more than twenty percent for eight consecutive days or more), retailers were early implementing effective demand-management methods, and the US grocery sector is a robust, resilient system that is predisposed to persist. Over the last month, I perceive that this predisposition included thousands of workers continuing on the job when they were probably covid positive and certainly when they had been exposed. Given omicron’s contagious reach (more), I find it hard to imagine most food processing or distribution center or retail workers having not been exposed. Given constraints on testing, the virus usually comes and goes without confirmation.

In December I contributed to a process to facilitate flows as safely as possible given the risk of omicron. Some positive steps were taken. In my judgment these efforts had almost no substantive effect. Timing, communication, and implementation were too ponderous compared to the speed of omicron.

What mostly kept food flowing in January has been the independent actions of millions who decided — mostly — to buy what they needed and not much more and to show up to work despite the risks. We are fortunate that omicron’s morbidity is much less than some prior variants and that substantial proportions of the population have been effectively vaccinated. We are fortunate that high volume, high velocity networks tend to be so stubborn.

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What happened and did not happen with food flows in January will continue to be ambiguous. I probably will continue to blog on this topic. I will also try to aggregate relevant data outputs below. I hope for some new data even later today.

January 31 mid-afternoon update: Today IRI has released updates for its CPG Supply Index for the last two consecutive weeks (ending on January 23 and January 30). This morning I speculated that the worst grocery flows were probably experienced between January 12 and 19. IRI’s assessment finds that that in-stock levels of edible categories declined one percent each for each of the last two weeks. I could be one week off or store inventory could lag flow (but by a week seems long to me). In either case the second-half of January had slower grocery flows than anyone wanted.

Below is the actual number of US hospital admissions for which covid has been confirmed. The omicron surge basically started with Christmas and peaked on January 19. Did workplace absenteeism coincide with or lag this indicator of morbidity?

The December job reports (released on February 4) include clues to how flows kept going in January. Job-leaving in January increased to 952,000 and 1.8 million Americans reported they were “prevented from looking for work due to the pandemic.” Given the omicron surge, these were not surprising outcomes. But despite this serious friction, new January hires were a surprisingly strong 467,000. According to the Bureau of Labor Statistics:

Employment in transportation and warehousing increased by 54,000 in January and is 542,000 higher than in February 2020. In January, job gains occurred in couriers and messengers (+21,000), warehousing and storage (+13,000), truck transportation (+8,000), and air transportation (+7,000). All four of these component industries have surpassed their February 2020 employment levels, with particularly strong growth in warehousing and storage (+410,000) and couriers and messengers (+236,000).

Absenteeism was up (how much is still up in the air), but businesses continuing hiring. I wonder if worries over absenteeism and other workforce constraints may have actually encouraged more new hiring?

February 7 update: The Sunday Washington Post has a good piece (posted online on Saturday) with retrospective color-commentary on the workforce context during the December-January omicron surge: Despite Omicron Surge, Businesses Desperate to Find and Keep Workers.

February 9 update: The IRI CPG Supply Index for the week ending on February 6 shows stock-outs continuing and, in some cases, worsening. The four percent drop in General Food was especially sharp. Stock-outs in non-edible may suggest decisions at the distribution level to use available assets to deliver food instead of beauty products (pure speculation).

Demand has continued strong since Christmas. Year-Over-Year pull for General Food has been up 7 to 8 percent since mid-January (and 2021 demand was about 7 or 8 percent higher than 2020 demand). But while demand sets the stage, during the first week in February a huge snow and ice storm impacted populations (and roads) from Texas to New England, spurring pre-storm stockpiling and slowing replenishment. Already low inventories were partially the result of omicron worker absenteeism, but the most recent plunge in available produce has a more traditional, seasonal cause.

February 15 Update: The Bureau of Labor Statistics is confirming/clarifying omicron’s impact on January flow capacity. I also comment on this in another post.

February 17 Update: The Census Bureau’s Pulse Survey (experimental) finds that during the period January 26 to February 7 a total of 7,772,708 employed Americans were not working because they were experiencing covid-related symptoms or caring with someone with covid symptoms. Another 5,049,124 were caring for children not in school or daycare. Another 3,016,462 were not working because they were concerned they would be infected or spread the coronavirus. For the period December 29 to January 10 the numbers for these three categories (in the same order) were: 8,753,923, 5,327,065, and 3,216,749. A Pulse Survey was not conducted during the two weeks January 11-January 25. I’m guessing absenteeism peaked during the intervening data-darkness. It is also worth recognizing that while increased absenteeism was constraining supply capacity, retail demand hit a new high (more). In the grocery sector, food sales did decline from December (Christmas) totals, but January 2022 sales were $70,010 million compared to November’s $68,948 million and the year-over-year comparison to January 2021 was 7.7 percent higher compared to $64,656 million. Yikes. I am just amazed at the power and persistence of grocery demand this late in the pandemic.

Strong demand persists

Posted on by Philip J Palin

The Bureau of Economic Analysis estimate of personal income and outlays for December finds another increase exceeding $39 billion (0.2 percent) in Disposable Personal Income. The potential for continued strong consumer demand is mitigated by a 0.4 percent increase in the Personal Consumption Expenditure (PCE) price index. Inflation is playing its role. But, please see chart below, there are still about 500 billion more (chained 2012) dollars available to spend last month than in December 2019. Two Decembers ago, Americans spent $10,264 billion on services, $3044 billion on non-durable goods, and $1545 billion on durable goods. Last month’s expenditures were $10,759 billion on services, $3560 billion on non-durable goods, and $1988 billion on durable goods. Those proportional shifts in buying goods require similar shifts in supply chain operations. December’s level of demand is much better calibrated with supply capacity than demand expressed in the first quarter of 2021. But, still, fulfilling one-fifth to one-quarter more pull is non-trivial. It is — has been — really tough.

Related media coverage: Bloomberg, Financial Times, Wall Street Journal, and Reuters. Additional context on GDP growth and such here and here and here.

Tuesday, January 28, 2020

Posted on by Philip J Palin

Two years ago this morning I answered a client’s questions about supply chain implications related to a novel coronavirus that had been identified in China. Here are some excerpts.

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The current epidemic in China is disrupting manufacture of products consumed in the United States.  [Client] has expressed specific concern regarding healthcare products.  There will be a substantial slowdown in Chinese manufacturing and related activity through at least February 8.  An extended period of disrupted commercial activity is possible.  While spot shortages of individual products are possible, overall US healthcare inventories should be sufficient for normal seasonal demand through late February.  If Chinese manufacturing and/or transportation sectors experience extended disruption, the United States is most likely to experience systemic shortfalls in the supply of medical consumables, followed by selected medical devices, nutritional supplements, and generic drugs.  If the novel coronavirus becomes epidemic in the United States significant disruption of demand and supply networks – including but well beyond healthcare – is likely.

According to the World Health Organization, as of January 27 there were 2798 confirmed cases worldwide.  According to DXY, a respected online physician forum in China, there have been 106 deaths associated with the disease.  Measures intended to contain the disease have suppressed manufacturing, transportation, and other commercial activities in most of China.  The target of 2019-nCoV can be characterized as all potential hosts, including all humans. The force of this coronavirus is not yet clear.  To date, impacts on demand and supply networks have been entirely the result of measures taken to control the virus, not a direct result of the virus or even the secondary effect of 2019-nCoV on the population. Official quarantine operations – combined with nervous buying and consumer hoarding – have effectively collapsed ordinary “last-mile” supply chains across much of the central Yangtze River Valley serving more than 55 million people.  There is also evidence, however, that long distance transshipment through the most impacted area is continuing by road, rail, and river.

More than sixty percent of confirmed cases continue to be located in Hubei province (especially Wuhan City) in Central China.  As of January 27, the CDC is reporting five confirmed cases and seventy-three pending cases in the United States.

It is too early to draw firm conclusions, but to date confirmed fatalities have been concentrated in individuals with significant preexisting vulnerabilities. Actual population effects will depend on the virulence of 2019-nCoV, something that is not yet fully understood.  In terms of effect on demand and supply networks, the population’s perception of virulence can be even more consequential than scientifically demonstrated effects.

US healthcare sources report that the United States is dependent on Chinese manufacture of “medical consumables” (all FDA Class I products and some Class II products). Using 2016 data, the Boston Consulting Group found that, “China dominates low-cost medtech manufacturing” with up to 78 percent of world capacity at the low-end. This includes products such as sanitary gloves, disposable syringes, surgical masks, gauze, serum collection tubes, etc. China has a strong export presence in FDA Class II medical devices, such as infusion pumps, pregnancy test kits, and catheters. The Chinese biochemical industry is a significant source of the Active Pharmaceutical Ingredients (APIs) needed to manufacture a wide range of pharmaceutical products. China is also a major source of generic drugs for the global market.

It is worth highlighting that there are structural and seasonal factors involved in the current status of US inventories for many healthcare products sourced in China.  Because Chinese products are concentrated at the lower end of value-chains they mostly utilize less expensive container shipping.  As a result, both manufacturing and transportation realities impose long lead-times on these supply chains. Further, there is a recurring annual slow-down of economic activity in China associated with the Lunar New Year.  Every year US distributors schedule procurements to reflect supply constraints associated with this holiday.  In 2020 this constraint was already anticipated for the period, roughly, from January 21 to February 1.  As noted above, this manufacturing “holiday” has essentially been extended through the first week in February.

If the novel coronavirus becomes epidemic in the United States and if mortality and morbidity rates for this virus continue to be modest, then the principal risk to demand and supply networks is likely to be unsustainable surges in demand reflecting consumer uncertainty regarding the resilience or integrity of local supply chains. This has already been observed in last weekend’s surge in demand for facemasks in New York City.  Similar behavior has been observed in central China impacting the retail food supply chain.  Nervous buying or hoarding tends to break-out in rather specific geographic – and population – clusters.  If the underlying uncertainty can be quickly and effectively countered in the initial outbreak, this can amplify wider confidence in supply chains and serve to discourage further demand surges.  But once any extended demand surge exceeds cycle-time of distribution capacity, retail shortages are inevitable, and retail shortages serve to inflame increased nervous buying and hoarding.

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Two years later:

The client was asking me for more after I had sent them an (unsolicited) January 24 note that included, “Hoarding has started in China.  Hoarding will crash supply chains worse than most cyclones or seismic events.” In many ways consumer behavior (demand management) has remained my “white whale“ for the duration of the pandemic; including earlier this month as I wondered what a combination of omicron-related absenteeism and nervous buying could do to US food flows. This month consumers were much more restrained than in March 2020.

My rhetoric is restrained. I was not explicit regarding the potential outcomes of the potential shortages in those product categories so quickly listed. Subsequent client notes assumed a more urgent tone. Within a few weeks billions of dollars were being spent to expedite flows of medical consumables and much more.

I’m not ready — and this blog is not the place — for a detailed after-action. We are not yet post-pandemic. Covid deaths continue to surge. But in the context of the early note above, network fundamentals have been clear enough. Demand leads, supply follows. Flows reflect distance and discontinuities between demand and supply. Emergent implications for flow are usually, at least strategically, clear enough.

Except that — nothing is clear to most of those who don’t work the flows day-in and day-out. Inaccurate assumptions have persisted. Decisions have been undertaken or neglected that had profound impacts on flows — typically with little or no thought given to flows. Decisionmakers (corporate, political, and otherwise) have been surprised again and again by excess demand or reduced capacity or increased congestion, all of which were predictable outcomes of their decisions. In May 2020 a colleague clearly called out diminished US freight capacity as an emerging (accelerating) cause of concern. Very little attention was given to this systemic constraint until well into 2021. The constraint was observable. The constraint was articulated. Mitigation was possible, especially with early action. Most mitigation measures were not undertaken.

There is an epistemological problem involved. We are much better knowing how-to-describe than knowing how-to-do something about what is described. In some ways, certain kinds of knowing actually seem to suppress — or at least complicate — doing. This disconnect is becoming a new White Whale for me.