Analysis & Commentary
There is a famous story about President Harry S. Truman which may or may not be apocryphal but seems probable given his inclination towards acerbic observations. He is supposed to have asked his staff to find him a one-armed economist. When asked why, he replied, “Because every time I ask economists about the future they always say: ‘On the one hand’ and then, ‘on the other hand.’”
So far this year most of the economic news has appeared to be glowing, with the stock market setting new records, employment rising beyond previous expectations, and consumer sales that remained strong following a healthy Christmas season, which had been accompanied by stronger consumer confidence.
But there are troubling signs as well, and some of these suggest that the numbers most often trumpeted by the news media may not be telling the full story and in fact could be concealing other factors driving unobserved tectonic shifts developing in how our nation’s and the world’s economies are heading.
The overall unemployment numbers may seem low in comparison to what they were during the pandemic when many businesses were locked down, but many of the new jobs created since then are part-time, and a large proportion of them are going to immigrants. And unemployed migrants are not counted in the unemployment numbers because they can’t receive unemployment insurance benefits and generally are left out of household surveys.
The labor force participation rate is nearing pre-pandemic levels at 62.5% registered in January 2024. Some economists expect that situation to worsen in the future and many employers continue to have trouble filling skilled positions.
Consumer sales are beginning to flatten out, suggesting that consumers are not quite as confident as earlier reports suggested. Americans are wary of possible future economic shocks, like last year’s bank crisis, and remain under pressure from prices that rose dramatically and are still going up, even though at a more moderate pace. It is also impossible to gauge (but can’t be ignored) how much anxiety is being created by the current Presidential election-year circus.
Consumers spent more than expected amid high inflation and high interest rates during 2023, but spending growth is likely to slow in 2024, asserts Jack Kleinhenz, chief economist with the National Retail Federation. Total retail sales for all of 2023 were up 5.32% over 2022, and core retail sales were up 4.46%.
Pandemic savings that boosted spending last year are shrinking, revolving debt has risen to pre-pandemic levels, and consumer confidence has risen but remains low, Kleinhenz points out. “Recent surveys show consumers are worried by a number of factors—the outlook for income, business and job market conditions slowing because of higher interest rates, ongoing inflation, and political stress.”
Inflation remains stubbornly persistent. It may not be rising at the frightening pace it was a few years ago, but a monthly rate of 3-4% increases on top of the previous steep price hikes is still having a nightmarish impact on all of us, especially lower-income people.
A fact seldom cited is that Americans are carrying record amounts of credit card debt. The assumption among those who analyze the credit card industry is that this is happening not because consumers are choosing to splurge on big-ticket items, but are racking up these debts by using their cards to keep up with inflation. In other words, when consumers can’t afford the immediate choice of buying both food and medicine, they get out the credit cards.
When it comes to manufacturers, raw material prices are expected to rise 3.2% during the first five months of the year, and wages and benefits costs are anticipated to increase by 5.2%, according to the Institute for Supply Management.
Consumer spending has appeared to have stalled, and the signals about its future trends are not particularly encouraging, registering tepid numbers in the first months of this year.
For the first time since the administration of President Gerald Ford, inflation has become a major political issue during a presidential election year. President Biden, running for re-election, felt impelled to refer to it in an ad that ran during the 2024 Super Bowl where he condemned “shrinkflation”—where products are reduced in size and weight while their packaging (and price) remains the same.
Inflation has become such a potent concern that when it was reported in February that January saw a 3.1% increase—a number higher than projections had suggested—the stock market crashed more than 500 points in a single day. The overall inflation rate also does not take into full account the spikes in areas that create ripple effects throughout the economy, such as recent hikes in diesel fuel, building materials and food prices.
Concerns also are resurfacing regarding the burgeoning national debt. Although critics of government spending have raised these concerns before, the United States is nearing the point where simply continuing to borrow the amounts needed to service the debt is seen as endangering the country’s ability to raise money in the future or any address unanticipated future needs.
In 2024, the U.S. is projected to spend $870 billion on interest payments on the national debt. By contrast, the federal government is expected to spend $851 billion on Medicare and $822 billion on defense. The overall deficit is expected to rise to $1.6 trillion in Fiscal Year 2024, and apparently there is little political will to do anything about it.
All of this is making our economic future more precarious. This is not just a concern being raised by right-wing advocates and politicians taking shots at the current administration, but is considered worrisome even by those who would not normally be viewed as raising this issue for short-term political gain.
Planning for Uncertainty
When it comes to how this is impacting the supply chain the most immediate effects stem from the hangover that followed the COVID crisis, resulting in changes in management priorities and an awareness that they need to be able to deal more swiftly with renewed challenges as they arise.
Transportation providers who were making good money while struggling to help retailers fill empty shelves during the pandemic have seen their numbers shrink as post-pandemic freight rates dropped through the floor in almost all modes. Large numbers of smaller truckers who popped up or expanded rapidly have closed their doors, along with Yellow Freight, one of the nation’s largest trucking companies for decades. And although industry ranks have thinned, rates have remained depressed.
The freight brokerage industry suffered a similar pattern of boom-and-bust, as last year they experienced a wave of bankruptcies and closures, including Convoy, which enjoyed the backing of tech giants like Jeff Bezos and Bill Gates, along with Surge Transportation and Transplus Freight System. Other brokerage firms announced waves of layoffs throughout 2023. Even industry giant C.H. Robinson, which was riding high just a few years ago, is hurting now.
Throughout last year rail freight saw declines in traffic as well. The industry suffered black eyes from the East Palestine, Ohio, derailment and hazmat explosion and a messy confrontation with its multiple labor unions late in the year. The labor woes and continuing complaints from rail shippers about poor quality service are a hangover from the industry’s embrace of the Precision Scheduled Railroading operations model, which some major rail lines are pulling back from. In the meantime, shippers and their customers must continue to deal with subpar and unreliable rail service.
The ocean freight industry is booming but trouble has surfaced because of inefficiencies leading to bottlenecks at some North American ports. Conflict in the Middle East unleashed attacks on shipping in the Red Sea that continues to hurt global trade. Unchecked piracy in the Indian Ocean has forced changes in routing for many ships as well. Nonetheless, ocean freight leaders appear to remain optimistic about their industry’s future prospects.
Air freight is another mode that has experienced a bumpy ride since the pandemic. Rates remain depressed but are improving, in part because of the recent disruptions to ocean shipping in the Middle East. The industry’s overall numbers were negatively impacted as well by retrenchments by the giant package carriers FedEx and UPS, who are both heavily engaged in air freight. The layoffs of pilots and crews and cutbacks in operations and equipment purchases appear to be prophylactic—designed to protect their companies from rising costs in the face of potentially shrinking demand.
For shippers and others dependent on freight transportation services, trying to manage all of this creates real headaches, not just metaphorical ones. “Many of today’s supply chains remain excessively lengthy and shrouded in opacity, making them ill-equipped to adapt to an increasingly turbulent world,” observes James Sirk, CEO of Tradeshift, a U.K.-based firm which provides high-tech solutions for supply chain and other payments.
“Rather than simply shifting single-sourcing models to locations closer to home, linear supply chains are also giving way to a much more networked ecosystem with redundancies built in to prevent a single point of failure,” he adds. “Such reconfiguration requires quick identification, vetting and onboarding of new suppliers, emphasizing the need for efficient systems and processes.”
Sirk and other logistics experts believe the keys to managing today’s overextended supply chains buffeted by continual and often unpredictable change are automation and artificial intelligence (AI). And that extends beyond managing daily operations, Sirk believes. “To build supply chains capable of weathering periods of volatility, supply chain operators need to be able to spot problems early. That requires visibility into the status and health of suppliers, often numbering in the tens of thousands.”
The old adage still applies: You can’t manage what you can’t measure. This means expanding the capabilities of traditional transportation management systems (TMS), according to the 2024 State of the Third-Party Logistics Industry Report issued by the logistics management software supplier Extensiv.
“Identify how your business can incorporate automated rate shopping into your order fulfillment process to get the lowest possible rates for each shipment,” the company advises. “Furthermore, utilizing advanced shipping software equipped with analytics tools enables you to optimize routing, track shipments in real time, and anticipate potential disruptions.”
Extensiv also contends that in order to collect the necessary fulfillment and order data to train AI-powered demand forecasting programs, retailers and merchants need to be able to access this information through system integrations. “A connected network of AI, machine learning and fulfillment software tools can provide a comprehensive overview of operations, from warehouse management to transportation logistics.”
Their opinions are also held by other logistics experts who agree that transparency is the highest priority for supply chain managers and will be for some time to come. Some customers may want the fastest delivery times while others are willing to wait for shipments to arrive, but one thing they always agree on is that the schedule ultimately must be reliable enough to plan adequately. If it always gets there in two weeks or the next day, they can manage that—it’s the inconsistency and unreliability that became more prevalent in recent years that have created havoc.
Warehouse 3PLs Offer Solutions
In the midst of this roiling change is the warehouse third-party logistics (3PL) industry, which boomed during the e-commerce boom prior to the COVID crisis, during which it profited from the need for amped up supply chain management storage services, as well as the burst of economic growth following widespread lockdowns and their customers’ desire to build up safety stocks to prevent consumers from being confronted by empty shelves.
But those days are behind us now, and industrial real estate experts are seeing modification of demand in the commercial warehouse and distribution center market. Due to the increased cost of financing and falling demand for new space in some areas, industrial starts declined by nearly half last year, notes Yardi Matrix, a commercial real estate data and research firm.
The global industrial real estate giant Jones Lang LaSalle (JLL) also reported that 2023 was generally sluggish in nature because it confronted obstacles including elevated interest rates, inflation, and reduced sales and leasing volumes. Industrial transactions declined by 54% in 2023 from 2022 levels as elevated interest rates challenged buy/sell decisions, the company said.
However, JLL and others believe that the warehouse industry will remain relatively healthy well into 2024 given the continuing needs for its services, especially when it comes to the highly diversified warehouse-based 3PLs that offer a broad range of supply chain management services.
It’s not just 3PL facilities that are adjusting to the slower demand. Retail- and manufacturer-owned fulfillment operations have been under the microscope since last year. Many of these operations that expanded during the pandemic are either being shuttered and/or are shedding employees. Part of the employment reduction also can be attributed to increasing reliance on robots to do the work in fulfillment centers.
Warehousing is expected to be on the rebound in 2024, according to commercial real estate experts like Colliers. It points out that in 2023 the industry was buffeted by the fact that, after experiencing a period of intense demand, record new supply outstripped demand. Last year developers added a staggering 607 million square feet of new space, far outpacing the net absorption of just 231 million square feet.
As a result, vacancies increased during each quarter of last year, culminating in the highest rate since 2016. “The balance between supply and demand looks to gradually return in 2024 as vacancy stabilizes and the market prepares for its next growth cycle,” Colliers predicts. However, the company also sees industrial real estate vacancy rates climbing higher in markets where significant speculative development is still underway, exceeding 10% in some markets. It predicts that with construction starts remaining limited, new supply will fall off during each quarter of 2024, resulting in supply and demand returning to equilibrium by year’s end.
One sign of the reconsideration of the shape of supply chains was the effort to make it more responsive and resilient by moving away from the embrace of “mega-warehouses” to make more use of smaller facilities closer to customers, as well as increased reliance on in-store pick-up and turning to some suppliers to make the deliveries.
Among the Top 100 industrial leases inked in 2023, 43 of them were for at least 1 million square feet, compared with 63 the previous year, according to the industrial real estate management firm CBRE. Last year’s top 100 industrial leases totaled 98.6 million square feet, down by 8% from 2022’s 106.9 million total. The average lease size among the top 100 fell to 986,744 from 1.07 million square feet.
Also telling were the type of tenants who were involved. The share by traditional retailers/wholesalers fell to 30 from 53, while that of 3PL warehouse operators rose to 29 from 11, the company reported. The food & beverage, automotive, building materials, manufacturing and medical sectors all had a larger share of the top 100 last year when compared with 2022.
However, CBRE predicts some improvement in mega-warehouse demand over the course of this year as the economy and rental rates stabilize. It also says the large increase in construction last year will provide more opportunities for expansion, particularly in markets with the highest rates of speculative development: Dallas-Fort Worth, Atlanta, Phoenix, Indianapolis and Columbus, Ohio.
