An Insider Explains the Supply-Chain Crisis By Tunku Varadarajan, 12/17/21, Wall St. Journal
The typical transit time for a container in pre-pandemic days was 71 days, Phil Levy says. That?s how long it took for a full container to depart from Shanghai; discharge in L.A.; proceed to a warehouse near, say, Chicago; get trucked empty back to California; and then return to Shanghai. The current transit time is 117 days or more. The greatest delays are in the U.S., owing to port bottlenecks and trucking shortages. The L.A. to Chicago leg, for instance, now takes 22 days,
12 more than before. It takes 33 days for the empty container to return to California, compared with 20 in the old days.Not only does it take much longer to import goods, it?s also become eye-wateringly expensive. ?Where it might have cost $1,500 to move a container across the Pacific,? Levy says, ?you?re seeing them go for more like $15,000 per container.?
This surge in transport costs has hit lower-value goods hardest and made quick restocking all the more of a challenge. Levy talked to a company that sells office supplies. ?They were moving a container whose contents were in the order of $15,000 in value. Well, if that now costs $15,000 to move, you have a problem, right??
The pandemic is at the root of the supply-chain crisis. Covid-19 has led to work disruptions at factories and ports in China, with quarantines and shutdowns hitting the production and movement of goods. Levy cites the monthlong shutdown owing to Covid cases in May 2021 at the Chinese port of Yantian, which handles 1/3 more volume than the Port of Los Angeles.
?It?s one of the major Chinese ports. And every time you shut down at one of those places, you?re interrupting the flow of containers.? Buildups and backlogs accumulate. ?How do you ever work them down?? Ports have fixed capacity: ?You can?t suddenly process twice or 3 times as many ships once a lockdown is lifted.?
90% of all exported goods move over the ocean. These include not only finished goods but also parts. ?So even if you?remanufacturing in the U.S.,? Levy says, ?the odds are you?re using some imported parts.?
Ports are built ?so you can just meet peak demand.? It?s too expensive to build at excess capacity, ?because then most of the time you?d have lots of extra stuff sitting around.? The peak season is Aug thru Nov, ?when it?s, ?How do you stock store shelves for the holidays?? ? The problem is that a system that can ?barely handle? a normal peak season has seen ?above peak demand for about an entire year and a half,? placing it under ?a cumulative strain it wasn?t really built for.?
A major cause is what Levy calls ?the defining economic characteristics of the pandemic.? There's been a ?marked tilt? in buying behavior, a shift from services toward goods. ?We still buy more services than goods, don?t get me wrong,? he says. But whereas U.S. consumers spent 69% of their money on services before the pandemic and 31% on goods, the breakdown now is more like 65% to 35%.
The pandemic recession was unlike previous ones. ?One of the ways that economists would normally have defined a downturn is that you get a decrease in production and a decrease in income.? But American pocketbooks ?were a lot more full than they normally are with a downturn.? It?s not hard to see why, he says, pointing to the Cares Act in March 2020 and other govt cash infusions in Jan and Mar 2021, ?which were directly putting money in. Pretty much all the movements in income track the movements in govt transfers.?
This meant that the pandemic ?didn?t have the effect that you often would?ve expected with a downturn, which is people don?t have money to spend. They did. And then their preference of what they spend it on tilted towards goods.? Some of this income was saved, too, so that consumers were flush even after govt support ended.
Demand for durable goods?those that last longer than 3 years? dropped briefly after the pandemic started, then ?shot right up in the early summer of 2020.? So while U.S. GDP gradually recovered in the 2nd and 3rd quarters of 2020, the recovery in U.S. imports was much more rapid?reaching pre-pandemic levels by Oct 2020 and continuing to increase.
Characteristically, the %% of personal-consumption spending on goods remains constant, Levy says: ?It?s a really, really boring graph.? But in the pandemic ?it?s gone haywire.? Whereas goods consumption previously ?might move up or down by 0.2%, here you were seeing moves that were 10, 15 times that.?
The fall in spending on services, meanwhile, was a natural consequence of the pandemic. Consumption plunged about 20% in April 2020, as people stopped going to restaurants, on vacation and to gyms. Business travel crashed. ?There?s been a slow, gradual climb,? Levy says, but consumption of services still hasn?t recovered to pre-pandemic levels.
As consumption shifted to goods, Levy says, the initial burst was in durables. That?s one reason why Fed Chairman Jerome Powell described inflation as ?transitory,? a judgment he?s since withdrawn. ? ?Transitory? was transitory,? Levy chuckles,
apologizing for the labored joke??trade economist humor,? he says. ?We find it where we can.?
Levy, who was a senior economist for George W. Bush?s Council of Economic Advisers, isn?t entirely unsympathetic to Powell?s initial thinking. ?It was based on what we saw with the surge in durables. If everybody had moved up their purchases of sofas or exercise machines, and so forth, by definition those aren?t the things you buy month after month after month. If I buy
3 years? worth of sofas all in one year, our expectation is this will be short-lived.?The durables spurt started in May 2020, and by month?s end they were ?right back to what they were pre-pandemic.? They rose to 10% above that level in June 2020. ?By the time you got to about March 2021, durables consumption was about 35% higher than it had been.? That was the peak; now it?s 18% above pre-Covid levels.
But there?s been another twist. The buying of nondurables? goods that last less than 3 years?has shot up. After a spurt in March 2020?remember the panic buying of toilet paper? nondurable consumption went down in April 2020, then made what Levy calls ?a slow, steady climb to where they're about now?13% or so above pre-pandemic numbers.? With ?inelastic supply and a big surge in demand, prices have to go up.?
One way for the supply-chain crisis to recede is, obviously, for the pandemic to end. But each new variant has the potential to halt any amelioration. A return to previous patterns of consumption would also reduce the strain on the supply chain. Yet for consumer demand to abate, people?s buying power would need to decline, or there'd have to be a shift back toward buying services.
The key question: ?When will we start seeing people behave the way they used to in their consumption?? It?s possible we won?t. ?People are creatures of habit,? Levy observes, and the pandemic has led them to take on new habits. So far, at any rate, ?we haven't seen a reversion to the previous patterns.?
The supply-chain crisis, Levy contends, has no parallel in history. We?ve had shocks before, such as the oil crisis of
1973. But ?global-trade liberalization and distributed speciali- zation,? allied to an ease of shipping and transport, fueled by ideas like ?just-in-time inventory??that?s all new.That means there are no lessons from history. ?This is a challenge my economists?my team?are facing, which is normally the way you?d like to forecast something like this.? They can?t find patterns by looking at ?the last 10 modern pandemics that we?ve had and see how they played out. You know the history of pandemics as well as I do. They weren?t modern. They weren?t in the era of supply chains.?
So what can be done to ease the crisis? ?In int'l comparisons of port efficiency,? he says, ?U.S. ports do not generally rank at the top of the list.? In considering improvements, it?s important to distinguish between short-term & long-term. ?My broader point about the centrality of the demand surge is that short-term improvements can help at the margin, but won't ?solve? the problem.? A longer-term approach would allow serious changes in capacity, but that ?shouldn?t be seen as a remedy for the current crisis.? A dramatic longer- term expansion in capacity may not even be necessary if the changes in consumption preferences prove temporary.
There are specific short-term measures that govts can take, such as liberalization of trucking rules, traffic control, land-use regulation for stacking containers and port-opening hours. But Levy is ?loath to put a small subset of these forward as a panacea.? As an analogy, he points out that if my editor asked me to produce 3 more articles of this length in 48 hours, caffeine and a new ergonomic keyboard might help, but I?d still probably feel swamped.
Mr. Varadarajan, a Journal contributor, is a fellow at the American Enterprise Inst. and at New York U. Law School?s Classical Liberal Inst.