Supply chain-mageddon? Economist Miller says, ‘Relax!’

Miller, knowing his opinions are very much in the minority, said he has the numbers to support his claims.

“I take comfort in knowing that my views are being informed by multiple independent data sources that point to the same conclusion,” he said in an email. “While the import supply chain is certainly under strain, calling this situation a crisis is unwarranted given the system has processed a record volume of imports for over a year.” 

The problem, Miller said, lies with the tsunami of U.S. consumer demand that slammed into supply chains almost overnight and that has not abated in 20 months. That networks are bending under volumes they were never designed to handle is not altogether bad news, according to Miller. Americans flush with cash and factories that are humming is better than the alternative scenario of tapped-out consumers and idle plants, Miller said.

Miller likens the present state of play to a manager telling workers their plant is in crisis, only to have an employee ask how that could be the case when the factory is producing 15% more than ever before?

Over the past week, Miller sent a reporter a blizzard of emails containing what he calls data “plots.” Between March and June 2021, U.S. retail sales excluding motor vehicles and parts rose 18.5% from the same period in 2019. The springtime spike coincided with $1.9 billion of federal stimulus from the third round of COVID-19 relief.

In response to the surge, retailers began buying and receiving large quantities of goods; retailer purchases, which again excluded motor vehicles and parts, rose an inflation-adjusted 14.8% for January through August 2021 relative to the same period in 2019. The typical increase in retailer purchases over a two-year period is 4.5%, Miller said.

Between March and August 2021, purchasing volumes exceeded peak-season levels of 2018 and 2019 (see graph above). Retailer buying during 2021 has been earmarked almost exclusively for inventory replenishment, Miller said.

If the import supply chain was broken, retailers would have trouble getting products to sell and move into inventory, Miller reckoned. Instead, he said, “retailers are getting in products, lots of products.” Besides, consumers wouldn’t still be buying furiously if shelves were empty, he added.

Then there is the volume of waterborne containerized imports entering U.S. commerce from the rest of the world save Canada and Mexico. Through August, volumes were on pace to hit all-time records — and were way ahead of levels reported during the same periods in 2018, 2019 and 2020. Through August, the ports of Los Angeles and Long Beach processed 21.3% more inbound containers than during the same period in 2019, leading to high utilization rates that would explain the large number of ships queuing at the ports, Miller said.

Taken in aggregate, Miller said the data conveys a clear message: “Systems that are broken can’t accomplish this.”

On the purported shortage of warehousing labor, Miller said the word “shortage” should be taken with a grain of salt. He defined it as a dearth of workers in industries plagued by falling demand, such as restaurants during the pandemic. That is not the case for warehousing, he said.

Warehousing employment in September was up by 91.6% from September 2014, not long after the e-commerce boom began in earnest. In California’s Inland Empire, home to the country’s largest warehousing complex, employment is up 1,585% since 2002.

The dilemma for many companies is that warehouse labor growth has been, and will continue to be, concentrated in a cluster of locations that have been attractive to importers, Miller said. The persistent and pronounced employment gains in those areas will eventually exhaust the available pool of labor who can or will work such physically demanding jobs, he said. 

“Part of the reason for the challenges in recruiting more workers is there are just so many folks in a geographic area who want this type of job,” Miller said, adding that labor supply isn’t “perfectly elastic.”

According to Miller, companies complaining of labor shortages are those that pay wages and benefits that may not be competitive in a market where workers hold more leverage than at any time in the history of U.S. warehousing. 

“I feel a lot of companies use the issue as an excuse for their inability to find workers,” he said. 

Businesses facing labor headwinds may want to examine the effectiveness of their own models, especially when it comes to wages and benefits, instead of blaming macro factors that require a more “mature conversation” to understand, he said. 

Despite all the challenges, the U.S. supply chain has passed a very stiff test, Miller said. This should moot the theory that the pandemic is a before-and-after event that calls for a redrawing of models in place for decades, he said.

“Why would you blow up a system that has worked well for more than 40 years because of a once-in-every-100-year event?” Miller asked. 

There is nothing wrong with supply chains that cooling consumer demand wouldn’t cure, Miller said. That may now be happening, based on government data. Americans’ personal income, adjusted for inflation, has declined since peaking in March when consumers binged on government funds from the third round of COVID-19 stimulus, according to data from the Federal Reserve of St. Louis. The pace of goods purchases has begun to slow, as have the purchases of durable goods, items expected to last at least three years, according to the data. 

Demand for e-commerce, apparel and furniture and home furnishings continues to be strong. But retail sales of building material, garden equipment and supply have been slipping for several months. Much of the slowdown in goods purchases can be attributed to consumers diverting more of their spending to services as vaccination rates increase and the economy has reopened.

Whatever the case, the cooling of the most white-hot consumer spending environment that anyone can remember will begin the long trek back to supply-demand balance, Miller said.

While some industries will continue to experience strong demand, for others the surge in March spending as consumers got their stimulus money was he equivalent to “last call,” he said.