Economy & Markets
Dude, Where’s My Stuff?
The global supply chain mess will require increased global vaccination and acquired immunity, semiconductor capacity expansion and the end of extraordinary housing/labor supports to resolve. We expect all three to occur over the next few months, leading to a global growth bounce in 2022.
The containership industry is a good illustration of the supply chain mess: as shown in the first chart, more than 70 containerships are stacked up outside Los Angeles/Long Beach ports waiting to unload. Idle containerships are back to just 3% of the total fleet, shipping costs are surging, manufacturing delivery times are extended and rail shipments are declining sharply from their summer peak, illustrating the far reaching impact of the delays.
Line chart shows anchored containerships in Los Angeles and Long Beach, shown as the number of containerships which has spike to a high of about 70 in September.
Line chart shows the container freight rate shown in US dollars per 40ft box and shows the Baltic Dry Index since 2018. The container freight rate has steadily been rising since January 2019, to its highest point of over $10,000 in September. The Baltic Dry Index remained at a level of 1000-2000 until recently, when it spiked to above 4,000, the highest level since 2010.
Line chart shows the arrangement of freight and cargo prices (PPI) shown as an index where 100 represents the December 2008 level. Prices have risen to a high of 160, after remaining below a level of 120 since 2009.
Line chart shows idle containerships as a % of global containership fleet. Idle containerships spiked to 10% in July 2020 but is now at around 3%.
Line chart shows US rail shipments, shown in thousands of carloads as a 4 week average since 2017. Rail shipments dropped to a low of 220 thousand carloads in early 2020, then increased to a peak of 300 thousand carloads, and have declined most recently to a value of around 260 thousand carloads.
Line chart shows global manufacturing delivery times since 1998, shown as an inverted index where a lower value represents longer lead times and a higher value represents shorter lead times. Chart shows that lead times are the longest they have been in history.
Why so many bottlenecks? Supply chain disruptions due to shipping cost discrepancies
COVID has disrupted supply chains in two major ways: surging demand for imported consumer goods in the West due to pandemic work from home trends and other home improvement spending, and a decline in workers required to maintain and operate these supply chains. The surge in US import demand has led to a sharp rise in eastbound freight rates (see charts for Shanghai->LA and Shanghai->Rotterdam). However, westbound freight rates have not risen nearly as much, leading to an odd and problematic phenomenon: incentives for container owners to move them back to China empty to accelerate receipt of eastbound freight rates, instead of waiting for containers to be refilled to earn westbound freight rates as well. This is illustrated in the fourth chart which shows departing containers from LA/LB: a lot of them started leaving empty once eastbound freight rates surged. This further exacerbates supply chain issues, since US goods (i.e., grains) that were supposed to depart US railcars and warehouses for export remain in place, occupying space that US imported goods were destined for.
Line chart shows the difference in rolling 5 quarter growth rates between goods and services. The dispersion in US goods spending vs services in the last few quarters is at the highest levels on record.
Line chart shows the container freight rate between LA and Shanghai, shown in US dollars per 40ft box. While the Los Angeles to Shanghai container freight rate has remained steady since 2012 (though with a small recent spike), the Shanghai to Los Angeles freight rate has spiked from a normal value of around $2,000 to a most recent peak of over $12,000 per 40ft box.
Line chart shows the container freight rate between Shanghai and Rotterdam, shown in US dollars per 40ft box. While the Rotterdam to Shanghai container freight rate has remained steady since 2012 (though with a small recent uptick), the Shanghai to Rotterdam freight rate has spiked from a normal value of around $2,000 to a most recent peak of over $14,000 per 40ft box.
Line chart shows Los Angeles / Long Beach empty vs loaded container exports, shown as 20-foot-equivalent units. Loaded container exports has stayed relatively constant at around 200,000 20-foot-equivalent units, while empty containers has spiked to around 600,000 20-foot equivalent units.
The other big bottleneck: the semiconductor shortage
Semiconductors are the world’s 4th most traded good after crude oil, refined oil and cars. Strong demand existed before COVID and reflected the chip-intensity of 5G, AI, electric vehicles (3-5x the chip content of ICE cars) and the internet of things. Current chip shortages are mostly related to older and simpler 200-mm silicon wafers used in cars, computers, monitors, laptops, TVs, refrigerators and washing machines. Demand for many of these items soared during the pandemic as people built out home offices and related projects; this surge in demand is illustrated below via the rise in Taiwanese electronic component exports. One by-product of the shortage: a rise in US auto manufacturer inventories and a collapse in dealer inventories as manufacturers wait for the chips they need. Auto consulting firm Alix now estimates that the semiconductor shortage will cost US auto manufacturers $210 bn this year, up from their $60 bn estimate back in January. Ford is actually offering customers faster delivery if they agree to “lower feature content”, which translates into fewer semiconductors.
There’s limited economic incentive to build new 200-mm chip plants given wafer-thin margins; only a handful of new ones are planned for 2022. Even so, there’s a few billion dollars being invested to expand capacity by ~20% in existing plants, in which case the semiconductor squeeze may start to ease by Q2 2022. Auto manufacturers are also discussing longer term contracts with Tier 2 suppliers that might incent them to build out new 200-mm capacity. As shown below, adding capacity to existing factories will take a few months at least, in which case the semiconductor shortage will drag on into next year.
Line chart shows exports of electronic components from Taiwan from 2001 to 2021. Exports have steadily increased throughout this time period.
Line chart shows inventory to sales ratios for US auto manufacturers, wholesalers and dealers. Automaker inventories have recently been piling up as the supply shortage continues, while wholesalers and dealer inventories have fallen.
Bar chart shows semiconductor fab capacity utilization rate as a percentage since Q1 2019. Chart shows that the capacity utilization rate has risen from 75% in Q1 2019 to nearly 95% in Q4 2020.
Bar chart shows the low and high range of months required to implement various solutions to the chip shortage problem. Tier 1 supplies can redesign parts and switch suppliers, taking 18-24 months. Silicon designers can move to a different factory, which would take about 9 to 12 months. Silicon manufacturers can either increase factory utilization (3-6 months), add factory capacity (12-15 months), or build a new factory (24-36 months).
Note that global supply chain problems are not getting better as growth momentum slows, since production growth is declining as fast as new order growth. For all the clients that have asked me about the political and economic problems associated with the rise of autonomous vehicles and more unemployed truckers, I keep telling them they’ve got it backwards: the US has had a trucker shortage for the last few years, and it’s projected to get worse. In other words, COVID has worsened some existing vulnerabilities in the US supply chain, just as global trade is surging. As for the August US inflation report in which CPI came in lower than expectations, that was mostly a function of COVID related declines in airfare, lodging and rental cars. These categories will probably bounce back when the Delta wave fades, and the other categories are still rising sharply.
Line chart shows global manufacturing PMI, where a value of 50+ represents an expansion. Chart shows that manufacturing new orders and manufacturing production dropped to a value of nearly 30, steadily increased to 55, and have recently slightly declined, with new orders slightly below 55 and production at around 53.
Bar chart which shows the truck driver shortage since 2011. The chart illustrates how there is a growing trucker shortage in the US, which is only projected to increase in the next few years. By 2028 the American Trucking Associations project the shortage will grow to 160,000 drivers.
Line chart shows global trade volume since 2007. The global trade index plummeted at the beginning of the pandemic, falling from ~110 to 90. Global trade has fully recovered and is now surging to the highest level since 2007.
Line chart showing the components of CPI grouped by COVID-19 impacted consumer goods and services, owners’ equivalent rent and all other goods and services in the Core Consumer Price Index. The COVID-19 basket includes apparel, lodging, airline fares, used cars, car insurance and car rentals. The August CPI report came in lower than expectations, which was mostly a function of COVID related declines in airfare, lodging and rental cars. These categories will probably bounce back when the Delta wave fades, and the other categories are still rising sharply.
Bottleneck resolution
First, the world is going to need more containers, which carry more than 90% of the world’s traded goods. Chinese companies affiliated with its government make 95% of the world’s containers and have ramped up production. The number of containerships in service is rising as well, albeit more slowly; again, China stands to benefit as the world’s largest shipbuilder (37% of the shipbuilding market in 2019 by deadweight, and 45% of all new shipbuilding orders). Another example of how China continues to reap unforeseen economic gains from COVID; another is the rise in global export market share that China has gained vs its Asian export competitors.
Line chart shows China container production in million cubic meters. The chart illustrates that China has already ramped up container production substantially to around ~22mm cubic meters.
Line chart shows an index of containerships in service globally. The number of containerships in service has been gradually rising since the beginning of the pandemic and is currently 7% above 2015 levels.
But more containers and containerships won’t solve problems in the West unless other supply chain issues are resolved as well. That will probably require (a) an end to extraordinary housing and income support measures, and (b) less community spread and concern about COVID. So far, most analyses show very little job growth differentials between US states that terminated subsidies vs those that didn’t 1. That said, some forecasts call for 1.3 million new jobs by year-end due to expiring unemployment benefits and another 300,000 new jobs due to school reopening. Around 2/3 of continuing claimants receive some pandemic unemployment assistance, which is another sign that such benefits are impacting the labor force participation rate.
Line chart shows 2021 payroll gains with bars illustrating estimates of the payroll gains due to unemployment benefits expiring, schools reopening and all other causes. Forecasts call for 1.3 million new jobs by year end due to expiring unemployment benefits and another 300k due to school reopening.
Stacked bar chart shows the ratio of continuing claims to job openings since the beginning of 2021. The chart breaks down all claims into two categories: claims under pandemic assistance programs and all other. The chart shows that 2/3 of those showing up in continuing claims are receiving some form of pandemic unemployment assistance.
The federal foreclosure moratorium officially ended on July 31. However, we don’t anticipate a sharp rise in new foreclosure filings due to a CFPB rule issued in June that established procedural safeguards that have to be met before foreclosures can begin (hurdles are hard to meet and include provisions that a property has to be abandoned, or that the servicer hasn’t heard from the borrower for an extended period). The new rule expires in December 2021, after which normal foreclosure patterns might resume. Foreclosures fell close to zero in the US once the moratorium was put in place. The second chart shows the gap between the MBA definition of delinquency which defines deferred payments as delinquent, and the Fed definition which does not. See Appendix for a discussion of homeowner vs renter treatment.
One more thing on housing: read about the issues with LoanDepot. So, one of many undercapitalized fintech lenders (most of whom have limited special servicing capabilities) allegedly processed thousands of loans without required documents such as employment and income verifications? Color me unsurprised2.
Line chart shows home foreclosures since 2003. The chart illustrates the impact of the foreclosure moratorium; once the moratorium was put in place foreclosures essentially fell to zero.
Line chart shows prior day COVID hospital admissions in US COVID hotspot states by 18-39 and 40-59 age groups. Prior day admissions for the 40-59 age group have risen to about 1,600, which is much higher than the previous peak of about 900 in January. Prior day admissions for the 18-39 age group have risen to about 800, which is also much higher than the small increase to almost 400 in January.
Housing and income policy may have to normalize before labor supplies do. As shown below, G7 manufacturing wages are rising at a very high rate given the prevailing level of unemployment, another sign of labor markets whose supply-demand equilibrium has shifted. By the way, I find it interesting that some people arguing for continued extension of COVID benefits also argue for the largest amount of new Congressional spending ($3.5 trillion), without explaining what that might do to current labor shortages, where all these new workers are supposed to come from and how all that spending might impact inflation and Fed policy. In August, 50% of small business owners said they had job openings they already couldn’t fill, the highest level on record.
Line chart which plots manufacturing wages versus the unemployment rate in the G7. The chart shows that manufacturing wages are rising at a very high level (~3% since last year) given the prevailing level of unemployment.
Line chart which should the percent of small businesses with hard to fill job openings. In August, 50% of small business owners said they had job openings they already couldn’t fill, the highest level on record
As for COVID, concerns may dissipate in the next few months. As we explained on our August webcast, this fall was going to be a very bad one in the US. Even so, given the high degree of Delta variant contagiousness, a combination of vaccination and acquired immunity should drive drive down pandemic measures substantially by November. The latest infection and hospitalization data from Hotspot states, horrific as they are (i.e., the world’s highest reported mortality rate) are beginning to roll over; mortality should follow. For anyone that disbelieves COVID mortality data, see the sixth chart below: there has been another surge in mortality from all causes in the US relative to seasonal trends. If you can think of another reason for this other than COVID, please let me know. The biggest risk to this outlook is fading immunity of vaccinated people; we will know over the next couple of months how this plays out in the US. Booster shots in Israel appear to drive antibody levels up substantially, and also result in Pfizer efficacy vs severe infection that rises above 90% again.
Line chart shows daily infections per million and daily deaths per million for the developed world. The rise in infections and mortality are much higher than was anticipated when the vaccination programs began. Daily infections are above 200 per mm and daily deaths are above 2 per mm.
Line chart shows daily infections per million, current hospitalizations and daily deaths per million for US COVID hotspot states. Daily infections and hospitalizations have begun to roll over from the latest surge, while mortality is still rising.
Line chart shows countries and US states with the 25 highest mortality rates. US hotspot mortality rates are now the highest in the world, alongside Malaysia, and are more than 10x higher than mortality rates in the rest of the developed world. Of US states, Alabama now has the highest mortality rate, edging out Florida.
Line chart shows daily infections per million, current hospitalizations and daily deaths per million for Israel. The COVID surge in Israel has been higher than anticipated given Israel’s ~70% vaccination rate. Daily infections are just below 800 per mm and daily deaths are close to 2 per mm.
Line chart shows countries and US states with the 25 highest mortality rates. US hotspot mortality rates are now the highest in the world, alongside Malaysia, and are more than 10x higher than mortality rates in the rest of the developed world. Of US states, Alabama now has the highest mortality rate, edging out Florida.
Line chart shows actual deaths per week from all causes vs the threshold for excess deaths from 2017 to 2021. Actual deaths from all causes were below the threshold from 2017 to the start of COVID, with the exception of a brief spike in 2018. Actual deaths from all causes spiked at the end of 2020 at about 90,000 before dropping to the threshold. Recently, however, actual deaths have started to pick up again and are well above seasonal trends (about 70,000 actual deaths per week).
Developing world infections and mortality are declining due to exhaustion of Lambda and Gamma variants in Latin America and the decline in the Delta variant in Asia (although mortality is rising in Eastern Europe again). Many Asian countries have higher COVID stringency rules than developed countries, an indication of how seriously govt’s view the risks and the ability of their healthcare systems to respond to it. Emerging markets are not the epicenter of most supply chain problems, at least as measured by supplier delivery times. But countries like Malaysia play an outsized role in the semiconductor food chain due to its role as a major center for chip testing and packaging, the last step in the semiconductor food chain which is also more labor-intensive than automated wafer fabrication. The delta variant has caused Infineon, NXP and STMicroelectronics shutdowns in Asia, which resulted in component shortages at Nissan, Toyota, Ford and GM operations elsewhere. Malaysia is also a large producer of multilayer ceramic capacitors, used in smartphones and cars.
Some good news on Asia. As noted above, infections and mortality are finally rolling over. Vaccination rates have hit 70% in Malaysia; while they are still less than 50% in Indonesia, Thailand, Philippines and Vietnam, acquired immunity appears to be playing a role now as well. Furthermore, mRNA vaccines should make greater inroads in the entire region in 2022, displacing Chinese vaccines with lower observed efficacy3.Finally, capital flows are returning in anticipation of less severe bottleneck issues ahead.
Line chart shows daily COVID-19 deaths per million people for emerging market countries (Latin America, Eastern Europe, EM Asia and the Middle East). In the developing world, infections and mortality are declining. This is the result of exhaustion of Lambda and Gamma variants in Latin America and the decline in the Delta variant in Asia (note that mortality is rising in Eastern Europe again).
Bar chart which shows vaccination rates by country. The chart illustrates the higher level of vaccination for developed countries relative to emerging market countries. Canada, France and South Korea have vaccination rates around 80%, whereas Vietnam, Indonesia and Philippines vaccination rates are closer to 30%.
Bar chart shows the Oxford lockdown stringency index levels for various countries. Many Emerging Market countries (in red) have higher COVID stringency requirements than developed countries, an indication of how seriously the governments themselves view the risks of the pandemic and the ability of their healthcare systems to respond to it.
Line chart shows capital inflows to emerging market countries since September 2013. In 2021, flows have been returning to the region in anticipation of less severe bottleneck issues next year.
Line chart shows index levels for US, UK and Eurozone manufacturing delivery times. All three locations show a steep increase in delivery times from September 2020 to now, starting at levels around 40-45 and dropping to 15-25, where smaller values indicate longer lead times.
Line chart shows index levels for Vietnam, India, China, South Korea and Brazil manufacturing delivery times. After recovering from small increases in lead times at the start of COVID, delivery times have not changed significantly for India, China and South Korea. Brazil demonstrated a larger increase in delivery times (around 10 at its worst), but has recovered to about 42. Vietnam is currently seeing a spike in delivery times to around 30, after having been between 40 and 50 for most of the period since January 2020.
Appendix: Homeowners vs Renters and US housing policy
- As discussed in the "Bottleneck Resolution" section, the federal foreclosure moratorium has expired and there are safeguards in place which should keep the number of foreclosures low until early next year when a CFPB rule expires. The federal eviction moratoria are separate policies; some have already expired, while GSE and FHA versions will expire at the end of September. Eviction rules cover renters and homeowners, while foreclosure rules only apply to homeowners. Several Democratic Senators have introduced legislation to reinstate federal eviction moratoria after the Supreme Court ruled that the CDC overstepped its authority in mandating it.
- States can apply their own foreclosure and eviction moratoria alongside the federal government; banks are required to follow both. There are currently live foreclosure moratoria in NY, Oregon and DC.
- While federal eviction moratoria prohibited evictions of renters and homeowners, the treatment for missed payments is different. For example, delinquent renters at the end of the moratorium are treated differently than homeowners who missed payments while in a CARES Act forbearance. Homeowners with federally backed mortgages (or with mortgages from banks applying this approach to all borrowers at their discretion) are allowed to defer missed payments and are not considered to be delinquent. In these cases, homeowners that don’t pay will not face immediate payment of accrued balances, which in most cases will be added as a balloon at the end of their mortgages. Banks generally record unpaid interest as current on an accrual basis. Finally, there are programs in place to modify mortgages for borrowers unable to resume their prior payments due to financial distress.
- Renters, however, are not explicitly allowed to defer; the eviction moratorium simply prohibits landlords from evicting them for non-payment. Renters could face immediate payment of accrued amounts, with any negotiated terms up to the landlord. In addition, non-payment could affect a renter’s credit score, while the same is usually not the case with homeowners under the circumstances outlined above.
- The Federal Emergency Rental Assistance program made $47 billion in funding available for tenants and landlords to be distributed by states and local governments. This funding was aimed at helping tenants cover rent, back rent and utilities as well as helping landlords cover mortgage payments. However, only $5 billion of this program was distributed as of July 2021.
- The National Equity Atlas estimated that as of mid-August 2021, 15% of renters (5.9 million renter households) were behind on rent payments. This compares to ~7% of renters unable to pay rent in 2017.
- Landlords who hold federally backed mortgages were eligible for the federal mortgage and foreclosure relief programs, which were extended through June 30, 2021.
- In addition, some states established their own rental relief programs. For example, New York’s landlord loan program provides loans to small landlords with a loss of rental income, and California’s rental assistance program helps both tenants and landlords cover rent and mortgage payments at the expiration of the eviction and foreclosure moratorium.
1 “Estimating the Impact of Unemployment Insurance Benefit Expiration on Employment Using August Microdata”, Joseph Briggs, Goldman Sachs, September 16, 2021.
2 According to a paper released by the Philadelphia Federal Reserve, 70% of the massive rise in fintech loans is simply due to regulatory arbitrage rather than fintech lenders having superior technology or lower costs. Also: shadow banks now control the riskiest segment of the market (FHA). You get what you pay for. See “Fintech, Regulatory Arbitrage and the Rise of Shadow Banks”, Buchak et al, NBER, 2017.
3 “Ravaged by Delta outbreak, Southeast Asia shifts away from China’s vaccines”, Washington Post, August 10.
