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Increasing costs. Evolving consumer expectations. And accelerating disruptions. Today’s supply chain leaders face more challenges than ever before. Hosted by Karl Siebrecht, the Logistics Leadership Podcast features industry interviews, warehousing and transportation deep dives and the unique insights supply chain leaders require to compete and win in today’s environment.
Narrator:
[00:00:00]: It's the Logistics Leadership Podcast with Karl Siebrecht and Ben Dean.
Karl Siebrecht:
[00:00:09] Welcome everyone to the Logistics Leadership Podcast. I am Karl Siebrecht. It is great to be with you again, kicking off season two of our podcast. Ben Dean, it is wonderful to see you again.
Ben Dean:
Yeah, it's great to be here. I hope you had a wonderful summer and excited to hear what we've got in store this season.
Karl Siebrecht:
[00:00:29] I did. Thank you. So it has been almost six months since we wrapped up season one. A lot has been happening. And we thought that the perfect place to start season two would be from the big picture. Let's check in on where we are in the logistics industry overall, where we are in the cycle and…
Ben Dean:
…Let's take a look at where we're at in the macroeconomic cycle, because we don't blow by ourselves in logistics. [00:00:55] The macroeconomic wins and geopolitical wins are going to determine what's going on in supply chain. So, I want to take a very zoomed out view of that, as well. But, before we get into that, I'd love to hear who you were speaking to this week.
Karl Siebrecht:
Yeah, so I've had a great conversation with Dr. Zac [00:01:12] Rogers, who's an Associate Professor at Arizona State and is one of the co-authors on a predictive survey called the LMI, Logistics Managers’ Index, which we're going to hear a lot more about here in a minute. So I spoke with Dr. Rogers. How about you, Ben? Who have you talked with?
Ben Dean:
So since we're talking macroeconomics, who better than Dr. [00:01:34] John Min, Macroeconomics Professor at Northern Virginia. He's also a consultant to a number of 3PLs, so he'll be able to connect those dots from that big picture to what we're talking about in logistics. I'd love to hear what you've got with Zac. I read the Logistics Managers’ Index every Tuesday, the first of the month when it comes out.
Karl Siebrecht:
[00:01:54] You're a subscribing member. That's great. So we got two doctors, unprecedented here on the Logistics Leadership Podcast. I'm excited to get going. So let's hear from Dr. Zac. I am super excited to welcome Dr. Zac Rogers, who is an Assistant Professor of Supply Chain Management at Colorado State University.
[00:02:17] He is also the lead author of the Monthly Logistics Managers’ Index, or LMI. Zac, tell us about yourself and a little bit about what you do.
Zac Rogers:
Absolutely. Well, thanks, Karl. It's great to be here in the season premiere. That's exciting. I feel honored by it. I will say actually that part of my introduction, I'm now an Associate Professor at Colorado State University.
[00:02:42] Now I know, Karl, you've known me since I was a lowly PhD student who didn't know anything about anything. So it's, I understand it's, you know, life comes at you quick. It's great to be here. I've been in logistics most of my life, really. Some would say I was born into it. My father is Dale Rogers at Arizona State University.
[00:03:01] And I grew up with him as a professor at the University of Nevada and Reno. Just watching him write books about supply chains while I skateboarded around the driveway and getting dragged to tours of warehouses and stuff like that. You know, most families would go to Southern California to go to Disneyland.
[00:03:18] We'd go see like, Oh, this is the really new one in the Inland Empire. Right. So we went on plenty of trips to California to look at warehouses and logistics and factories and all kinds of stuff. So I've been in it a long time. But, after school, I ended up getting a job in procurement at a casino.
[00:03:35] I worked in procurement for about a year. And then after that, I left the casino and I left it because, and this is a business tip for all the listeners out there, my checks went from being signed by the Grand Sierra Corporation to JP Morgan because they had repossessed the building. That happens, kids.
[00:03:51] It's time to find a new job. And so I went to work for a company called Quidsi, which was an e-commerce retailer. And within about a month of me working there, they were acquired by Amazon. So then I worked there as an employee and subsidiary of Amazon for about two and a half more years. And while I was there, I did a lot of inbound logistics.
[00:04:09] I was mostly in receiving and returns. And, and then on the weekends, cause I worked weekends cause I was the newest manager, I worked on shipping boxes out the door. After a few years of that, I went back to Arizona State, or I went to Arizona State, rather, to get my degree in supply chain. And one of the first things we did, or maybe it was one of the last things really as a PhD student, we came up with the Logistics Managers’ Index, or the LMI, which is one of the things we're going to be talking about today.
[00:04:40] And the idea behind the LMI is that America really, and the world, is so interconnected through logistics. It's 9 percent of GDP. I tell my students this sometimes and they don't believe me, but I say stuff like, look, the logistics industry in the U.S. is bigger than the GDP of Mexico and Mexico is, you know, top 15, you know, 20 GDP in the world.
[00:05:07] It's not the stuff on the trucks or in the warehouse, it's just the trucks in the warehouses. It's this giant piece of our economy. And so the idea with the LMI was essentially to be a modern day PMI. So I'm sure all the listeners today are familiar with the PMI, the Purchasing Managers’ Index, started by Hoagland and Fearon, Michigan State and Arizona State, professors actually, cause everyone in supply chain went to like five schools.
[00:05:33] So the idea they had was a great idea for the early sixties when they developed the Index, which was, well, if something's going to be sold before that, it has to be an inventory and it has to be manufactured. So let's look at changes in manufacturing and inventories and things like that.
[00:05:52] And that'll tell us how to predict, how to predict future economic activity. And it worked great by the way, you know, those guys had the two biggest houses in East Lansing, Michigan, I think, because they were so good at predicting the economy. So in 2016, we went down to actually the PMI offices at ISM, which is in Tempe.
[00:06:12] And we kind of asked them, okay, so how does this work? I mean, we knew the basics, but you know, how do you guys do it? And they were very nice to us, you know, ISM and Arizona State are very, very closely linked. So they helped us out with the methodology and really we just copied their methodology.
[00:06:27] But the difference is, instead of looking at things like production, we look at logistics. So the idea was, yeah, in 1961, it makes a lot of sense to predict the U.S. economy by manufacturing, but in 2016 probably makes sense to look at things like transportation because we're a service economy.
[00:06:47] And so the idea was, well, if it's going to be sold in a store in August, it's going to be on a truck in July or in a warehouse in July. And so essentially what we do is we ask, and we have a really nice, respondent base, is always great about taking time to work with us. And they're all folks who are director level and above in their company.
[00:07:08] So people really have a 20,000 foot view of the supply chain. And we asked them about eight different indices and we say, is it going up? Is it staying the same or is it going down? And so the things we asked them about are inventory levels and costs, and then both transportation utilization we asked them about capacity, utilization and price.
[00:07:26] And so by knowing those eight metrics, we have a really good idea if the logistics industry is expanding this month or contracting. We're going to talk about numbers here. Any number over 50 is expansion. Any number under 50 is contraction.
Karl Siebrecht:
Okay, got it. Makes so much sense. You move from a manufacturing economy more to a services economy where manufacturing, or a great deal of it happens offshore.
[00:07:55] So now let's track logistics instead. So you ask managers about what they are seeing or what they are doing in terms of their spend levels. Give us a sense of who are these managers? They work in Fortune 500 companies? They work in the logistics services industry? Who are these folks?
Zac Rogers:
They're really from across the spectrum.
[00:08:16] We have a lot of manufacturers, a lot of retailers, and then LSPs. 3PLs, freight forwarders, fleets, warehousing folks, really from all over the place. And within retail, we have it broken out into, you know, apparel, electronics, home and garden. It's a pretty wide slice in terms of industry.
[00:08:39] And we also ask, okay, you know, how big is the company? We have companies, be under $10 million respond to this thing. And we have companies in the, you know, high billions, responding as well. There’s a couple of Fortune 500 folks on there that we get every month. So it's a very broad spectrum.
[00:08:56] Most of them are based in North America. But obviously operate internationally.
Karl Siebrecht:
Great. So you've been tracking this or doing this survey since 2016 on a monthly basis?
Zac Rogers:
Yes, September of 2016 we started. In the first maybe year and a half we were every two months just because it took a while to build up the critical mass of respondents we needed.
[00:09:19] There'd be months where we weren't even getting the triple digits in the first days. And so it's really, we wouldn't feel comfortable going out with 70 people and saying, Hey, here's what's happening. So we did it every two months in the beginning. Now we do it every month, maybe for the last six years about.
Karl Siebrecht:
[00:09:35] Got it. So I want to start to get into what you're seeing in the data, you know, just to provide a little context. I know our audience probably doesn't need to be reminded of this, but from the tailwinds that COVID generated for the logistics industry in large part, as an industry, we've run into some headwinds, starting probably in 22, 23.
[00:09:57] Actually, if you wouldn't mind, give us a sense of what you're seeing now in the most recent data here, midway through 2024, but also give us a sense of the context and how that relates to what you've seen over the past two years or so. Where are we in the trend?
Zac Rogers:
Okay. So you're absolutely right.
[00:10:19] COVID was sort of the driving factor in all this. And here's the analogy I've been using. It's sort of like COVID was you're driving your car and you see something in the road and you swerve to the right. Well, generally what happens after you swerve to the right, is then you swerve back to the left and you overcorrect.
[00:10:34] And so we had overcorrection, correction, overcorrection, and you might sort of spin back and forth, right and left on your car. And then finally, eventually those oscillations will get smaller and you’ll start to go straight again. We're starting to go straight again is what's happening.
[00:10:52] So if you look at things like inventories, we've been running pretty lean, especially downstream all summer. But upstream, so if we're talking about wholesalers and distributors, we've seen inventories pick up Port of LA and Long Beach all through July, if you look at their TEU is up 40 percent year over year.
[00:11:15] From last year, which to me says seasonality. It's the first time really since COVID that it seems like we're having a normal, healthy inventory buildup going into back to school, Q4, holiday spending. So it seems fairly normal. The other thing we're seeing is we're finally starting to come out of the freight recession that we had been in for the last two years.
[00:11:39] So the freight recession really started in, either April or May, I would say May of 2022. That was when inflation was crazy and there was just, things weren't moving. And then the last three months of our report, so May, June, and July of 2024, transportation prices have grown faster than transportation capacity, and those are the two metrics we look at to decide, are we in a freight recession or not?
[00:12:11] Now that we've got a full quarter of it, I think we can say, unless something crazy happens, that the freight recession is probably over. And so what that means is we're now soaking up enough of that excess capacity that we built up over COVID. So going back to COVID, like you asked there, we had such a classic bullwhip effect.
[00:12:35] So the week six of sophomore year supply chain at every university in the country is, we play the beer game and we learn about the bullwhip effect. Now that the problem is, when you're in it, when you see all of this, you know, put yourself in the shoes of say, Target, or any large retailer in mid 2021.
[00:12:58] You're thinking, gosh, people are spending so much money. They just got a trillion dollars put in their pockets twice. Twice in 18 months, we got a trillion dollars put in our pockets. We can't spend money on services. There's no Taylor Swift concert tour this week, you know, this year, we can't go to baseball games.
[00:13:14] So we're spending money on goods. Ecommerce grew, for example, in the three months between January and April of 2020, ecommerce grew as much as a percentage of retail as it had in the previous eight years. Anybody who's like, why did supply chains break?
[00:13:36] Well, imagine if your boss came to you and said, Hey, this quarter, we’ve got to get eight years of work done. That's what happened in ecommerce. And so we have this huge demand and everyone's rushing to catch up. Remember that people were like chartering their own ships to go across the ocean, get around the lines, all this kind of crazy stuff.
[00:13:53] And we really built up inventories with the thought that, okay, December of ‘21 is going to be the biggest Christmas holiday season ever, December of ‘21. And that was the first time we thought something was wrong. So in our report in December ‘21, we saw that inventory levels went up from November to December.
[00:14:14] That should not happen. Inventory is not supposed to go up in December, but it did. And so we thought, well, that's odd, especially because we know we still have supply chain delays. So not all the inventory that was supposed to be here is even here yet. And it was a couple of things. One was. What was it called?
[00:14:33] Omnicron. I don't know if you remember that, it was like the fourth version of COVID. You guys remember it was like the Jaws Four of COVID and it just shut down the East Coast. Spending just stopped in the biggest part of the country. And so we didn't get rid of inventories. And then the thing that happened after that was, ships kept showing up.
[00:14:54] So we had placed all these big orders and like what always happens when we play the beer game with students and in real life is, demand is often in front of supply. And so supply got there and demand was already starting to dissipate. The holiday season was over. And then at the end of February, end of February ‘22, Russia invades Ukraine and Ukraine gets invaded.
[00:15:20] Now, suddenly, twelfth to an eighth, depending on the numbers, of all diesel fuel is just gone. Two of the five biggest producers of wheat, that's not coming out anymore. You know, oil and wheat are inputs into a whole lot of things. And suddenly that's gone. At the same time, all of that stuff that was supposed to show up for Christmas shows up for President's Day, basically, which is not as big of a shopping holiday.
Karl Siebrecht:
[00:15:44] Not as much of a gift giving occasion.
Zac Rogers:
Yeah. Hey, Karl, what'd you get your wife for President's Day this year? It's a bust of Thomas Jefferson. And so we have all this inventory now stuck right as inflation picks up like crazy. And so we built up all these goods and now we're not spending on it.
[00:16:04] And that is also when the freight recession hits, because now we built up these huge, massive truck fleets for this crazy demand. And we knew the party was going to stop eventually, we just weren't expecting it to stop right then. But suddenly, bottom falls out and we just have the logistics industry.
[00:16:23] Everyone's sitting there looking at each other basically through the rest of 2022. In warehousing, it was just jam packed, right? Like you have companies saying, Oh, we're taking billions of dollars of write downs just to get rid of inventories because we can't even walk through our distribution centers anymore.
[00:16:39] Amazon had two prime days that year. You know, we were doing anything we could just to run down all of these goods. And that really persisted even through last year. So, 2021 was, we can't get stuff here fast enough. 2022 was, we don't have anywhere to put this stuff. Right. And then 2023 was very cautious.
[00:16:57] A lot of people thought there'd be a bounce back in ‘23 and we were never incredibly optimistic about the bounce back in ‘23, partly because it's, it goes back to like Isaac Newton of, for every action, there's an equal and opposite reaction. So we had two years of real boom and we thought, well, are we only going to have nine months of a kind of pullback and then bounce back?
[00:17:19] It seemed unlikely because remember we built up capacity for two years of a boom and it seemed unlikely that things are gonna come back, especially because interest rates never came down in 2023. People thought, Oh, maybe summer of ‘23, you know, and they ended up missing the boat by about a year.
[00:17:37] Which in hindsight seems like maybe it was the right move. But it kept costs really high and it stopped, especially upstream, big investments from happening. So we are not seeing the big investments in, Oh, let's build some new warehouses somewhere. I mean, you had investment in manufacturing because of the CHIPS act and things like that, but you didn't have a big investment, especially compared to ‘21 and ‘20, in a sort of warehousing networks and things like that.
[00:18:04] Stuff slowed down and we ran inventories pretty lean for most of 2023, as well. We saw a small buildup at the end of ‘23, but nothing like it was in ‘21. And it was also late in ‘23. Right. So the buildup happened late because people were thinking, well, I don't want to get burned again. And now coming in at ‘24 inventories have really been run down, especially retailers. Retailers, like JIT is back basically, and now,
[00:18:34] it seems like we're getting back to regular seasonality.
Karl Siebrecht:
It's fascinating. So a little over two years in then, the freight recession, we're kind of ready to call it over seeing three months of data?
Zac Rogers:
I think so. I think now, you never know, right? I mean, something crazy could happen tomorrow.
[00:18:54] You know, we didn't see COVID coming. We didn't see Ukraine coming, you know, who knows what could happen. And we could certainly have, you know, trade policy is one of the things on the ballot in November. And if we have a big change in tariff policy, that could also change the flow of goods, certainly.
[00:19:13] But you know, status quo, like Ceteris Paribus, all things being equal, it does seem like the freight recession of ‘22 and ‘23 is coming to a close.
Karl Siebrecht:
Yeah. And in the data, are you still seeing relative areas of softness across the logistics landscape?
Zac Rogers:
Yes, yes.
Karl Siebrecht:
What are those?
Zac Rogers:
So the big split we see right now is upstream versus downstream and we classify upstream and downstream by, downstream is basically retailers.
[00:19:46] Anyone customer facing upstream is kind of everyone else. So distributors, manufacturers, wholesalers, things like that, 3PLs. Upstream is seeing inventories grow. In June, the numbers we had for the upstream downstream split were, 51 and a half upstream and a 37 downstream.
[00:20:09] Basically what that represents to me is downstream firms are running down the sort of spring and summer inventories, getting ready for new stuff to come in. You know, my wife and I were at Costco a couple of days ago and she was appalled because Halloween decorations are already out. In July? So companies are running down that summer stuff and bringing in, you know, pumpkins and stuff.
Karl Siebrecht:
[00:20:36] Right. For quick context, when a number is greater than 50, that means it's expanding and below 50 means it's contracting and sort of the further away you are from 50, in either direction…
Zac Rogers:
The faster that's going. So if you are something like, say, Warehousing prices for our upstream firms.
[00:20:57] That's at 67. That's a pretty fast rate of contraction. Downstream it was 56. So still, or sorry, fast rate of expansion, I should say. Downstream was 56 and a half. That's still expansion, but not as fast. And so one of the things when you're reading the indexes, just because something say goes from, and I'll, I'll use an example from say, July.
[00:21:23] Warehousing prices from June to July of 2024 went from 64 and a half in June to 60.6 in July. Okay. And so it went down four points. That doesn't mean that warehouses are cheaper. It just means that the slope is flatter than it was the month before. So the growth has sort of slowed down.
[00:21:47] So the thing that we're seeing right now is that overall inventory levels are still slightly contracting. So overall in June, there are 47.4, in July, 49.1. That to me though, doesn't necessarily mean softness.To me that says JIT. And we would definitely expect those numbers to go back above 50.
[00:22:13] I mean, at 49.1, we were close in July. I would definitely expect us to go back above 50 in August and September, especially downstream, we start to bulk up again for spending seasons. And it looks like, honestly, we could have sort of a Goldilocks economic situation in Q4, especially if interest rates really come down in September and consumer spending has sort of lasted.
[00:22:47] I mean, yeah, we're doing more stuff, buy now, pay later, more credit card, but it's lasted. And the key to interest rates going down is, upstream will be able to make some investments, greater investments. And that will, that should sort of bring up demand in different places, I think. And especially it'll sort of supercharge freight activity upstream in a way that we really haven't seen for probably two and a half years, right?
Karl Siebrecht:
[00:23:17] Right. Yeah. You almost don't want to say it out loud, but you know, this whole soft landing thing might actually kind of sort of be happening.
Zac Rogers:
I know it's like, it's like a no talking in the clubhouse kind of thing. It’s like a perfect game in the seventh inning and like, don't talk about it.
Karl Siebrecht:
[00:23:31] Hey, and I have to ask, so does Fed Chair Powell have you on speed dial now that this LMI is, is so insightful?
Zac Rogers:
Not him. We have talked to some folks from the San Francisco Fed who have been very nice to us. One thing I would recommend everybody checks out, Adam Shapiro at the San Francisco Fed does a breakout of the sources of inflation, both supply and demand inflation.
[00:23:54] And it's fascinating. You know, a lot of our big inflation times came from the supply side, not the demand side. I think we've done all we can with interest rates at this point. And really when you saw inflation starts to go down, it was when supply chains kind of unkinked in mid 2023.
[00:24:13] And we got through a lot of that excess inventory that was driving the cost up, kind of all over the place.
Karl Siebrecht:
Got it. Well, this has been a fantastic explanation of the LMI. And I would just encourage all our listeners to look up Logistics Managers’ Index and sign up. There's an email they can sign up for.
[00:24:36] You'll get it dropped into your inbox. Is this true?
Zac Rogers:
Yep. We will send it to anybody. It comes out the first Tuesday of every month and we send it to you for free. The last year of reports is up on the site for free. Unlike Hoagland and Fearon, we're not making a lot of money on this yet.
[00:24:57] But we're generating value and we make nice friends like you guys.
Karl Siebrecht:
Value creation starts and then value capture, maybe you can follow.
Zac Rogers:
Exactly, we're artists over here, Karl.
Karl Siebrecht:
I get it. I love that. That's great. Well, Zac, this has been a real pleasure.
[00:25:16] I've learned a lot. Really enjoyed speaking with you. Again, for everybody, this is Dr. Zac Rogers and go check out the LMI. Hopefully you will not only learn something from it, but it might give you a sense for what's coming. So Zac, thank you again.
Zac Rogers:
Thank you so much, Karl, for having me. It was a lot of fun to be here and I look forward to hearing from anybody who's interested in the Index. And you know, the whole idea of the Index is, if we ask as many smart people who are well informed as we can about what's going on, the picture is just going to get better and better.
[00:25:53] So if that sounds like you, listener, and you want to send me a note, I'd be happy to add anybody to our list. And especially to a respondent list. If you just want to get the thing every month and not participate, that's okay, too. We're just happy to get this in front of people.
Karl Siebrecht:
Wonderful. Thanks again, Zac.
Ben Dean:
[00:26:09] Karl, that was a great conversation to get us kicked off, really set the bar high. I'm wondering, being in the room with the guy, at least virtually, what was your biggest takeaway from that conversation?
Karl Siebrecht:
Yeah, Zac is great. You know, I've been a reader of that report that comes out every month for several years and I always have found it to be very valuable.
[00:26:33] I have to say, now that I've talked to him in depth, I understand even better how it works and what it means. And I think it's really, really powerful. I think that it has, when you look back and you look at how that index was trending, and then you overlay that on what actually happened, now that we look backwards, we know what happened.
[00:26:56] Zac made the comment, Hey, you know, in December, inventories went up and that shouldn't happen. That never happens in December, and then of course you look back and we know now what happened. I just feel like it was a very poignant moment to understand that this is a powerful tool and I'm going to be an even more eager consumer of it going forward and just help us keep tabs on where we think things are going. You know, the other thing that I was really curious to hear from him and asked him explicitly is, you know, do you think the freight recession is over?
[00:27:28] We all heard the answer there. It sounds like probably. You know, it’s been three months of data trending in the right direction. But you know, unless there's another big surprise out there, maybe we can start to feel comfortable about that. How about you, Ben? What jumped out to you from listening to Zac?
Ben Dean:
[00:27:44] Yeah, well, I took note of that call on the freight recession, as well. And we've got a few months until we do the futures episode. So we'll know whether he called it right or not at that point. Look, all operators and supply chain, especially design network planning roles, want to be able to predict the future better than the leading indicators are hard to find here.
[00:28:04] So LMI for me is interesting because in the, you know, sentiment indices tend to not be that forward looking, but like you said, that call on December inventories was ahead of most people's understanding of where that was headed. And one area that I'm really focused on just in my space and warehousing is that price index on warehouses.
[00:28:25] And one thing we expected and haven't seen over the past two, three years is we've had a somewhat tepid economy and Dr. John's going to speak to that as well, but the warehouse price index has consistently been in growth territory. And from where I sit, you look at the core numbers on vacancy rates and they've been going up consistently at the same time, at least since Q1 of ‘23.
[00:28:48] So that dissonance has been a hard one for us to understand. And a lot of it, Dr. John speaks to this about, you know, longer lead times on leases and how that's fixed in time. So we don't see those things happen as quickly, but we did get signals from the LA and Inland Empire market actually in the last two months in June that they went into negative territory.
[00:29:10] No longer growth in rates there in the biggest warehousing market in the U. S., so that is an absolute turning point. So we're looking at a couple different turning points that are lagging each other. Freight now seems to be back on the way up. Prices are going up and warehousing is finally starting to respond.
[00:29:27] Where it goes in the future I'm sure we're going to be talking about in the next few episodes.
Karl Siebrecht:
That's right. Well hey, that's a great lead-in to your conversation with Dr. Min.
Ben Dean:
Yeah, great. So we're talking about the state of logistics here. I think Dr. Min's comments regarding the overall state of the economy, kind of going from Q4 of 2023 through the next quarter of 2025 is a really good place for us to really couch what's going on. What I want to start with here is a clip, interestingly, and when we were talking about bullwhips, Dr. [00:30:01] Rogers talked about that car analogy of oversteering and trying to whip it back in the other direction. So I want to start here because Dr. Min's talking about looking at the U.S. economy over the last three or four quarters, and the next two to three quarters, in terms of the speed of that car. So let's take a listen.
[00:30:20] Dr. Min, let's do a layman's kind of point of view on the economic cycle, especially over the last six months, seven months, kind of getting us into August of this year. What's 2024 look like from a macroeconomics point of view? Where are we at?
John Min:
If we're having this conversation about six months ago, [00:30:40] beginning of January, let's say this year, a lot of people thought U.S. economy was going to slow down rapidly. As a result, people were expecting, especially investors, they were expecting interest rates six times this year. And just in response to inflation coming down, but more importantly, slow down in the economy.
[00:31:01] But the amazing thing is, we have to give a lot of credit to the U.S. consumers. I mean, U.S. consumer spending drives 68, 69 percent of GDP. And what's amazing thing, American consumers are still buying. Now it's getting to the point that it's getting a little tiring because the savings rate has declined to 3.5%.
[00:31:22] Usually we're 6% pre COVID, 3.5%. Credit cards have been maxed out. We have a record credit card debt. And if we start going up slowly, but still, consumers are spending and main reason is because there's a robust employment condition in the U.S. As long as people have jobs in the U.S. you get paycheck and you spend it.
[00:31:47] And that has been very, very good driver, I guess it's a tailwind for the U.S. economy. So instead of U.S. economy going into a recession or slow down, the first quarter we grew about 1.8%, second quarter 2.8%. You combine it, we're growing at about 2% rate this year. Now that's a step down from last year, which was about 3.4%.
[00:32:12] Especially the fourth quarter. So in a layman's terms, last year, second half, phenomenal. We were driving 70 miles an hour on highway cranking the music, feeling great. And now we're going about 60 slowing down to 55, maybe 50 miles an hour. Our projection or forecast for the second half this year is consumers have used up all their excess savings from COVID. There's no more checks coming from Uncle Sam. The savings rate is way down because they're tapping into it. Debt level is, interest rate has to come down, but I think it's going to stay sticky.
[00:32:52] Maybe one interest rate cut this year around September. If that's the case, I think the U.S. economy is going to slow down or the car is going to slow down to about 35, 40 miles an hour, which is not bad because Europe is going about 25 miles an hour. Japan is moving at about 15 miles an hour. Relatively, we still have the fastest car except for India, which is growing very rapidly, and China is slowing down.
[00:33:19] So we may actually, China may actually slow down toward the U.S. in the next year or two. So relatively, we're gonna be fine. If you're running a business, I think you will see a slowdown eroding of consumer demand, and it's going to ripple through the supply chain, right?
[00:33:39] And I’m tracking the satellite feed of all these big container ships coming to U.S. ports real time. And number of ships, the delays, the waiting time is getting less and less and less. So when I see a slowdown on the front end, global trade side, it's going to hit the main street in about six months down the road. So, if I'm making a forecast for six months out, it will be definitely slower than what we want today.
[00:34:05] And we're already seeing it at the front part of the supply chain. There's less ships, less containers coming and WTO just released their annual survey. It's going to be slower than last year.
Ben Dean:
I love the car example, by the way, I think that's for logisticians. Gives us something that we can think around.
[00:34:24] And we're in this interesting economic cycle, right? To your point about speed, where if we were still going 70 miles an hour, we were expecting to see the Fed as the kind of police on this, slowing us down through other methods. And now we're not having that happen because the economy is resilient.
John Min:
Exactly, keeping the interest rate high, trying to slow us down.
[00:34:49] But if we slow down too much, then Fed is going to tell us to put the foot on the accelerator, which means they’re cutting the interest rate.
Ben Dean:
Adaptive cruise control. That's what we're looking for. So one of the clearest intersects here, Karl, between the overall economic picture and supply chain is around imports and exports, and there's a lot of rhetoric in that space.
[00:35:11] Dr. Min and I tried to stay away from the politics too much, but you can hear in his comments that we're about to play that there is definitely a more protectionist stance coming in the world of tariffs, and this is going to have both positive and negative impacts on import volumes. Let's take a listen.
John Min:
[00:35:32] The Biden administration's second wave of tariffs are kicking in next month. So solar panels, EDs, things like that. But it's not going to be as dramatic as after the election. If you read the platforms of both Republican and Democrats, it won't make any difference. We expect the tariffs to go up. How high?
[00:35:52] I don't think it's going to be up to 60 percent, as the former President Trump is suggesting. But he does want to impose 10 percent for all imports coming in. Right. So that's one side. Harris administration, I don't know what her view is, but we can sense that either administration is going to be less global in their orientation, more in sourcing, of friendly sourcing.
[00:36:19] So we do see a big boom of trade between Mexico and U.S. So if you're in the logistics industry, I'm sure you felt it because we're getting less imports coming from China. In fact, China is actually circumventing all these tariffs by shipping it to Mexico and they are shipping up to U.S. So we have worked with a lot of freight forwarders on the Texas, California border, and they are booming.
[00:36:46] Because we process their payments in Mexican peso and their volume is way up. They're very busy. In fact, they are having a hard time finding enough workers. Especially drivers, right?
Ben Dean:
What was really interesting there to me was this, you know, tariff protectionist stance that the U.S may be taking next year. We're making a stronger stance in that direction.
[00:37:10] That doesn't seem to be unique to the U.S. this year, seems to be a really heavy election cycle for the EU and other nations. Are you seeing that trend and what's the impact of the export side of the equation?
John Min:
From the economist point of view, looking at the data, China is experiencing deflation. The main reason is their demographics, the people are getting older, they spend less, there's less domestic demand.
[00:37:33] And China was built on manufacturing capacity. And the only way they're going to get themselves out of their slowdown in growth with the deflationary prices going down is export. So they're exporting EVs, steels, pretty much everything. And they're dumping it in these markets. So from an EU perspective, it's 15% of the cars sold in the EU are made in China.
[00:38:00] It's a Chinese EV car. So if you go to London, if you flag an Uber, it's Chinese EV and they're good. They're really, really good and they're cheap. Because of all this, you know, related factors you're seeing everyone raising tariffs. At the end of the day from a macroeconomist point of view when the tariffs go up it's really taxes on the consumers and the international business tends to slow down, which means less growth. So globally, at IMF and World Bank.
[00:38:34] They're not too optimistic about overall global growth rate for next two to three years if these tariffs continue to go up at the various markets.
Ben Dean:
Most of us in logistics are always looking at the data, but moreso like we're going behind the data to understand if it's accurate, timely, and can tell me something about what to do with my business.
[00:38:56] I had some of my preconceived notions here, Karl, upset by Dr. Min, because some of the traditional ways we look at economic data, historically, are becoming less accurate and less timely. So, specifically, the nominal reports on PPI, CPI, overall GDP, what we're finding here is that they become less accurate over time.
[00:39:18] And they're less valuable as a resource, frankly, when you're looking out the rearview mirror three months, and you can't even recognize that that data is a hundred percent accurate. Let's hear what Dr. Min had to say.
John Min:
So we are using less of the traditional economic reports coming out of BEA, Bureau of Economic Analysis, or the Bureau of Label Statistics, or the Commerce Department, for two reasons.
[00:39:42] Number one, they're always looking back, right? 30 days, or three months. Another main reason is that those reports are getting less accurate, because the response rate to these surveys has dropped significantly after COVID. So, we're getting to the point of, could we trust this data?
[00:40:08] There's a lot of noise. So whenever economic report comes out, the following month there's revision. And then the degree of revision adjustment that’s made is getting bigger and bigger, which indicates that the quality of data we're getting is not as good as it used to be. And if you just go to one of these government agency websites, I mean, they're upfront about it.
[00:40:32] Response rate for the unemployment, response rate for the GDP is way below the typical percentage terms we're used to. I still use the official data. But I want to triangulate that by getting a private real time data. And if it triangulates, then I have a pretty good picture of what's happening. I have a couple of friends working for hedge funds, and one particular hedge fund is buying up malls at huge discounts around the U.S.
[00:41:01] In order to assess the valuation of the mall, they're using a satellite to see how much people actually go in and out real time. And they're tracking it. And now, they empower them with AI. So they can take out the holiday effects, seasonal effects, and they say, based on traffic monitoring for the past 30 days, and then they also figure out what type of cars are parked to see what type of demographics. It’s all done at the satellite level.
[00:41:33] Now, when China shut down, I utilized a company out of New Jersey. They were providing satellite feed of real traffic in China. And that's my best source of data as to whether the Chinese economy has collapsed. It's not. And one of the reasons why there is increasing use of these real time data point of sale data.
[00:41:56] I call it the API integrated, that's the Application Programming Interface. So different companies' data can be all integrated into one database, and you can use AI to cut and paste different ways to see where the economy is happening, real time.
Ben Dean:
I think that our listeners are really going to value things that they can look at as predictive indicators.
[00:42:19] And we're talking with Dr. Rogers about the LMI, which is obviously a great index for determining where sentiment and the logistics industry is headed. But Dr. Min's looking at some very different data points in order to predict where supply chain is headed. And with things like AI and satellite tracking, that is changing very quickly.
[00:42:38] So I think it's really important for our listeners to hear how he's looking at advanced indicators of demand and supply.
John Min:
I think that one of the best indicators is just go to Google, type in GDP now. It's the real time indicator of where the U.S. economy is. And what Atlanta Fed does is, it takes all the indicators that's coming out real time, then put it in the model, then crunch their best estimate of what the U.S. economy is.
[00:43:07] And it has been very accurate for the past two and a half years. It's the real time data because, you know, when you get the GDP numbers, it's a lagging report. It's looking back. I want to know what's happening now. Right. So if you want to know what's happening now, you should be looking at the Atlanta Fed GDP now.
[00:43:27] There is an opportunity insight. There's a consortium of various universities like MIT is involved, Harvard is involved. Some of the credit card companies are involved and they share data. They harmonize it and they show you real time data on consumer spending based on your credit card and ATM charges.
[00:43:49] So we're tracking all that. The bottom line is though, unless stock market comes down a bit and unless unemployment rate goes up, so less people are working, I think the U.S. economy will continue to grow about 2%, which is very remarkable.
Ben Dean:
And I did wanna include this last clip from Dr. Min. Because I've heard this throughout our interviews through the first season, in that the pace of change within logistics is faster than it's ever been.
[00:44:16] So we as logistics leaders need to be faster, more nimble, and be looking at the right leading indicators to be able to respond quickly and not three months from now.
John Min:
All business folks need to be able to pivot on a fly because things are changing rapidly. Again, six months ago, we thought the U.S. economy is maybe going into a recession.
[00:44:38] Six rate cuts. Three months later, turned out to be three rate cuts and maybe soft landing. Now only one. So every three months the story or the landscape is changing. So I do feel a lot of empathy for those folks who are planning ahead, trying to figure out warehousing, the logistics and all that, because things are changing every three months.
[00:45:01] So, pay attention and be able to pivot on a short notice.
Karl Siebrecht:
That was fascinating. Hey Ben, great job steering that conversation with Dr. Min. I have to say, after listening to that, I'm kind of jealous I didn't get to speak with him. That was really great.
Ben Dean:
Well, I'm sure you'll get your chance. We're going to be talking to him more and frankly, I'm just excited, not just for the season, but for this holiday and peak, because I'm hearing optimism from our guests for the first time in a long time, right?
[00:45:31] Like you've got Zac saying we are calling the end of the freight recession and the biggest thing I heard from Dr. Min was that we've got a soft landing coming with maybe one to two interest rate cuts, but we're back to normalcy by mid next year. So there's some light out there at the end of the tunnel. What else did you hear from him?
Karl Siebrecht:
[00:45:50] That's what I was just going to say, you know, what really jumped out at me was the way he talked about the connection, the very direct connection, between supply chain and the broader economy. In particular when he talked about his, specifically he has a model that connects the price of containers to the CPI.
[00:46:10] And when I reflect back on what Dr. Rogers reminded us, most of us already know this, is that logistics, the spend on logistics, is somewhere around eight, nine percent of the GDP of this economy, which is equal to the size of the GDP overall of Mexico. You know, of course that makes sense when there's so much activity.
[00:46:33] Bound up in one part of the economy, particularly now that we're in the services based economy, and lesser until we get lots more reshoring. It just stands to reason and makes total sense that what happens in supply chain will drive what happens in the macro economy and vice versa. What happens in the macro economy will impact greatly what happens in supply chain.
[00:46:55] So super fascinating, in particular, just how poignantly he put a point on that.
Ben Dean:
Absolutely. Well, excited for the next episode here.
Karl Siebrecht:
We’ve got a lot more episodes teed up to come, some great topics. I'm really looking forward to it. Ben, we'll have you back here next time and for the rest of the season. And until then, let's keep the conversation going.
Narrator:
[00:47:22] You've been listening to the Logistics Leadership Podcast presented by Flexe. The opinions of the guests aren't necessarily the views of their company. If you'd like to learn more about the podcast or join the Logistics Leadership community, check out this episode's show notes and visit flexe.com/logisticsleadershippodcast.
[00:47:42] Keep the conversation going. Email us at leadershippodcast@flexe.com. The Logistics Leadership Podcast features original music by Dyaphonic. The show is produced by Robert Haskitt with Jeff Sullivan, Ben Dean, and Karl Siebrecht. Thanks for joining us.