Prior to the pandemic, how often did you think about, let alone discuss, supply chain bottlenecks? After all, what was there to think about? Stuff just ended up on the shelves, somehow. It all just happened. Easy peasy, nice and easy.
These days? Not so much. If your favorite product is in stock, you are probably paying more for it than you were not so long ago. Am I right? The oft-given reason? You know it; supply chain bottlenecks are driving up costs throughout the system.
But how did it get to this? In such a short period of time?
The kneejerk reaction, the low-hanging fruit, is to blame a surge in consumer demand after the worst of the pandemic was over. Throw in the vast amount of money the Federal Reserve and Washington has been throwing at the economy, and voila! The distribution system in the US simply couldn’t handle the strain.
That seems fair enough, until you realize that explanation just isn’t good enough. Why couldn’t it handle it? After all, the US has, or supposedly has, the world’s largest, most dynamic economy! If this is the case, it should also be efficient as well, right?
One would think.
Unfortunately, the more I have read about the recent distribution snafus, the more I have come to the conclusion this mess was going to happen at some point. The surge in demand was the proverbial “straw that broke the camel’s back.”
The best article I have read on the matter is by a Scott Lincicome, at the Cato Institute, in an article entitled “America’s Ports Problem is Decades in the Making,” which hit the website on September 22, 2021. I freely admit the Cato Institute is a ‘libertarian’ think tank, which advocates laissez-faire economics and a non-interventionist foreign policy. However, the points Lincicome makes seem to make a lot of sense to me in light of the current, shall we say, crisis.
Below is his final paragraph and summation, as well as the link to the website itself:
Summing It All Up
On the surface, the pandemic is the main cause of the “shipping crisis” and the related pain to the U.S. economy. And given the wild swings in global supply and demand—and players’ inability to snap their fingers and add new ships, warehouses, trains, or maybe even workers—these pressures will continue for the next several months, if not a little longer. But dig a little deeper, and we see that much of the current mess in the United States was decades in the making, reflecting systemic labor and trade policies that decrease the efficiency and flexibility that U.S. ports — and the economy reliant on them—enjoy in the best of times and desperately need in the worst. Sure, these same policies undoubtedly enrich a handful of U.S. workers and companies, but the shipping crisis has revealed some of their much bigger, usually‐unseen harms—and the necessity of reform.
https://www.cato.org/commentary/americas-ports-problem-decades-making
In the article Lincicome mentions something called the IHS Markit ‘Global Container Port Performance Index (CPPI),’ in conjunction with the World Bank. The picture it paints of the efficiency of US ports is ugly, very ugly.
Not a single US port made the Top 50 in terms of efficiency, using IHS Markit’s ‘statistical approach.’ The highest ranking American port was Philadelphia at 83. The Port of Virginia came in at 85, NY & NJ was 89, and Charleston was the only other US port in the Top 100 at 95. The 2 biggest container ports in the United States are the Port of Los Angeles and the Port of Long Beach, which control much of our trade with Asia. These two limped home at 328 and 333 respectively, out of 351 ports in the survey. For its part, two other major West Coast container ports, Oakland and Takoma, were 332 and 335.
To put these levels of efficiency into perspective, consider this: Dar es Salaam was ranked 324, and Mombasa came home at 331. Basically, our primary ports in handling Asian trade are about as efficient as those in Tanzania and Kenya. That is hard for me to grasp.
Now comes the fun part: where do we get to point our fingers? Who is to blame for this? How do we fix the problem?
There are so many layers to this onion, it isn’t even worth trying to cast blame on one specific thing. Chassis and container requirements at various ports. Drayage trucking delays due to a variety of factors. Lack of automation (when compared to more efficient ports) due to a variety of factors. Compressed hours of operation relative to the volume of trade. Lack of adequate storage capacity. Long wait times due to staffing shortages. The list goes on and one.
Suffice it to say, ‘we’ have not treated the efficiency of our primary container ports as a national priority. ‘We’ have largely left that in the hands of local and state authorities. Given the fact cnbc.com ranks California as the 47th most expensive state in terms of the ‘cost of doing business’ and the least ‘business friendly’ state (50th out of 50), is it terribly surprising our West Coast ports, specifically in California, are lagging the international competition?
This is a problem, because if the ports and distribution centers are choked in California, guess what? They will be choked across the country, if not the entire world, as countless containers sit offshore awaiting a berth OR are stacked on the docks (and storage facilities) waiting to be picked up…grinding everything, everywhere, to a halt.
In the end, roughly 50% of US trade with Asia flows through the Ports of Los Angeles and Long Beach. These are some of the least efficient ports in the entire world (according to the CCPI), which are located in the least business friendly state in the United States. Throw in a black swan event like the pandemic, and the predictable happened….bottlenecks throughout the entire country.
In my opinion, the health of the US economy is far too important to be left in the hands of the bureaucrats in Los Angeles, Long Beach, and Sacramento. However, the most likely alternative, Washington, doesn’t look too hot either. Whew.
You know, these bottlenecks make me want to have a few longnecks, if you catch my drift, and you know what they say, right? “Longneck, ice cold beers never broke my heart,” or put a dent the economy either.
Take care, thank you for your continued support, and be sure to listen to our Trading Perspectives podcast.
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.