The Supply Chain Story Everyone Neglects

Countless ships linger offshore, containers are piled high on the docks, and trucks wait in frustratingly long lines to pick up loads.

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Facing significant inflation, a surge in consumer spending, and the prospect that supply chain bottlenecks will disrupt the holiday season, President Biden announced a deal last week to expand operations at the Ports of Los Angeles and Long Beach – where 40% of U.S. bound shipping containers arrive.  Biden hopes a 24-hour, seven-days-a-week operation will unlock persistent logjams, reduce shipping delays, and generally accelerate the distribution of goods.  In turn, cost pressures ease, and lengthy delays in holiday deliveries are avoided.

Notice, Biden did not address the demand side – the core problem.  Instead, the administration focused attention on a convenient scapegoat, the link in the supply chain that exhibits visible disorganization and inefficiency.  Countless ships linger offshore, containers are piled high on the docks, and trucks wait in frustratingly long lines to pick up loads.  These are images that attract the news media, animate public debate, and linger in the public imagination.  They highlight private-sector failures and deflect scrutiny of the government’s role in creating the crisis.      

To many Americans, the president appears to be addressing a long-standing private sector problem.   Pete Buttigieg, Biden’s Transportation Secretary, told The Hill, the government will act as “…an honest broker, brings together all of the different players there, secure commitments and get solutions that are going to make it easier.”  In other words, markets are broken, and now the government will fix them.    

The president lavished praise on labor unions and thanked local municipal officials for their fine work in settling matters.  The president did mention private sector help – notably Walmart, Samsung, and Home Depot.  But threatened, “if the private sector doesn’t step up, we’re going to call them out and ask them to act.”   

To be sure, politicians want to show the public they are doing something to solve important national problems.  The ports are important, and the disruptions are front-page news.   It is, however, ironic that the federal government now feels it can solve a problem that it created.    

Let’s examine how the government created the Great Supply Chain Snarl of 2021.   

Americans are buying, buying, and buying

Supply chain troubles are tightly linked with the broader challenges of strong consumer demand.  While robust spending is generally a positive development, an impressive rebound in retail sales that began in the summer of 2020 – and continues to this day – far exceeded conventional year-over-year expectations.  At the onset of the pandemic, retail sales initially dropped 23% - from March through April 2020.  Then, incredibly, snapped back 34% from May through October.  After that, sales blasted off, peaking in April 2021 at an extraordinary $562 billion.     

The federal government fueled the buying spree with unprecedented spending and monetary stimulus. Several massive covid relief packages, combined with the Federal Reserve’s array of monetary initiatives, drove sales well above pre-pandemic trends, producing abnormally high excess demand (retail sales > trend line).  Statista estimated the value of the fiscal stimulus packages, as a % of GDP, at a whopping 26.4%!  

Consider the impact on retail sales depicted in the graph.  From 2010 to 2019, the growth of retail sales was gradual, neatly tracking the expected trend line.  Past sales offered an excellent predictor of future sales.  Then, a rapid and dramatic month-to-month increase, after an equally dramatic pandemic decline.  And peak sales, well, they explode off the charts.  Nothing compares to it.  

The federal government juiced retail sales to dizzying heights, overwhelming transportation, and a warehousing network optimized to accommodate a predictable demand load.   The whipsawed demand surge shocked the supply chain, creating genuine confusion and panic.  And, as demand continued an upward trajectory – surpassing the system’s design capacity, the supply chain broke down.  By prioritizing the demand side – without concern for downstream supply issues, the federal government unleashed a massive wave of consumer spending that simply crushed the supply chain.   

Analysts suggest flexing the supply chain to match elevated demand will take many months.  By contrast, demand-side monetary and fiscal tools could be applied quickly and with greater precision.  The government could pump the brakes, tamp down demand, cautiously, avoiding an abrupt correction.  Admittedly, there are risks.  But the current supply chain troubles risk even higher inflation and could produce their own, less manageable, and more painful downturn in consumer demand.   

Instead, the Biden administration pursues the supply chain; private sector charge governments have comparatively little experience in administering.  The messy, confusing, slow, and sometimes chaotic covid vaccine distribution represents the government’s latest efforts in supply-chain management.   

A major shift in spending from services to goods  

By imposing shelter in place orders on millions of Americans, and effectively closing “non-essential” businesses, governments unknowingly shifted consumer expenditures.  Households postponed entertainment options, restaurant meals, and vacations and invested the money instead in home improvement items.  Spending on household goods rose notably – furniture, entertainment technology, home office equipment, DIY projects, and fitness gear.  By May 2020, spending on goods surpassed spending on services and smashed pre-pandemic records.     

The switch to household goods prompted notable increases in manufacturing activities, which translated into more items to ship and more freight to haul.  This added even more pressure on an increasingly troubled and unbalanced supply chain.    

Most analysts, including iLevel, expected that after widespread distribution of vaccines – and a year of social distancing, limited holidays, and government mandates – consumers would quickly return to leisure and service spending.  But this was not the case – delta variant notwithstanding.  

By June 2021, service spending finally recovered to pre-pandemic levels.  However, spending on goods remained elevated.  Again, like retail expenditures, spending on goods shot up quickly and reached unexpected levels – it’s off the charts.         

This caused an explosion in U.S. imports. Calculated by shipping container volume, imports increased 5% year-over-year this past month, and up 17% from September 2019.  In short, the sustained demand surge for goods flooded the ports.        

Bottom Line

For the past year and a half, the government’s economic policies have been sharply focused on consumer demand.  And demand exceeded everyone’s expectations – by a lot.  In retrospect, the three covid relief packages and associated monetary policies were excessive and imprudent.    

Retail sales burgeoned and consumer spending switched from service and leisure to household goods.  The buying binge placed extraordinary pressures on a supply chain designed to operate at peak capacity for only a few short months – before the holidays.  After peak season, supply chain problems can be assessed, inefficiencies corrected, and backlogs processed.  But since the onset of the pandemic, it’s been peak season 24/7.   

There are just so many ships available to haul containers across the oceans; just so many berths where ships can dock, just so many cranes to unload containers, and just so many chassis to move containers inland to distribution centers.  Trucks and drivers, dockworkers, and warehouse staff are limited as well.  All of this was well known before the pandemic.  However, it was discounted by policymakers fixated on consumer expenditures.    

Biden’s LA port deal, and Mayor Pete’s conspicuous absence, do not inspire confidence.  Industry analysts and those working on the front lines are in fact skeptical.  Executive VP of strategy and alliances at the Association for Supply Chain Management Douglas Kent tells Forbes, “Removing the bottleneck in one area – the ports – doesn’t create flow….other modes of transport that follow from there – rail and trucking – are stressed to break too,” Similarly, president and senior analysts at ACT Research Kenny Vieth  said to CCJ, “Port throughput is not just taking containers off steamships, but having the capacity in the yard to position those containers, the chassis to put the containers on, the drivers to take the freight from the ports, and the capacity in the rail network to facilitate the hoped-for acceleration in port throughput.”      

There are two ways out of the mess.  First, businesses invest in added capacity to meet the “new normal” of goods demanded.  This takes time and demands significant capital investments.  It also requires businesses willing to place big bets that present consumption patterns persistent into the future.  Considering the data presented here, that’s a risky bet.  The federal government overreacted to a recession of its own making.  The nation’s supply chain should be cautious and not overreact as well.  

Second, retail sales return to something closer to pre-pandemic levels, and consumers begin shifting from goods back to services.  This appears likely.  In the spring, Congress passed a third and final round of covid relief.  Now, as inflation spikes, the Federal Reserve appears ready to tighten monetary policies.  

If increased demand crippled the supply chain.  Reduced demand can help repair it.         

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