Supply is generated, delivered, and sold to fulfill demand. Supply Chain fitness reflects the capacity of upstream and midstream supply to fulfill downstream demand in a timely and affordable way. Contemporary high volume, high velocity supply chains depend on persistent (preferably increasing) demand.
During the month of July real — inflation-adjusted — personal consumption expenditures in the United States continued to slowly expand in a manner that should support Supply Chain Resilience. See the first chart below, where blue is real PCE for services and red is real PCE for goods. Explaining July results, the Bureau of Economic Analysis offers, “The 0.4 percent increase in real PCE in July reflected an increase of 0.7 percent in spending on goods and an increase of 0.2 percent in spending on services. Within goods, the largest contributor to the increase was motor vehicles and parts. Within services, the largest contributor to the increase was health care.”
Reuters reports, “Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after advancing by an unrevised 0.3%… After adjusting for inflation, consumer spending gained 0.4% after rising 0.3% in June, and implied that spending retained the momentum from the second quarter, when it helped to boost gross domestic product growth to a 3.0% annualized rate.” That solid increase in GDP suggests the current level of demand is more than ephemeral. See the second chart below, where blue is real GDP and red is GDP per capita. At least for me this steady increase in both GDP and demand is especially impressive as evidence accumulates that the lower earning two-fifths of consumers are cutting back (even as the highest earning one-fifth spends more, here and here and here).
For those making and moving and selling goods that are purchased directly by consumers, this demand pattern supports continuity, operating efficiencies, and confidence. During 2023 and early 2024 soft freight demand and more excess capacity resulted in a tough freight market. Some excess capacity has since been shed. Improved second quarter demand has resulted in much more sustainable rates in many markets for many carriers. See the third chart below.
Is something close to current demand and supply sustainable? There are known risks. If an October 1 dock-workers strike happens, US freight flows, especially east of the Mississippi will be disrupted. Labor issues and other constraints in Mexico and Canada have downstream implications for the US. Prospects for a China-US Trade War seem entirely plausible (here and here and here). We are in the early stages of a significant re-wiring of global supply chains (here and here). Accelerating US federal debt and interest payments threaten to suppress economic growth (here and here and here and here). Any high-end seismic event along the San Andreas, Cascadia, or New Madrid faults could have devastating long-term impacts on US supply chains. Losing more than one major refinery in the same hurricane season would be a serious challenge (here and here). There are, of course, plenty more Gray Rhinos, Black Swans, and other exogenous exotics.
Supply Chain Resilience is, however, less about any specific threat and much more about systemic vulnerabilities. Such vulnerabilities are almost always the dark side of a significant strength. US supply chains are well-organized around high-volume, high-velocity patterns of demand. Where there is effectual demand, supply chains will scurry to adapt. Any sudden and sustained shift in demand patterns will cause cascading complications, disruptions, and delays — as seen during the pandemic. As also demonstrated in 2020-2022, those supply chains with the best understanding of and engagement with demand dynamics are the most effective and agile at adapting.
