- Allen Czermak
How the Dismal Economy Affects Intermodal Transportation
The threatening words recession and inflation are finally being admitted into our national lexicon reluctantly. The presidential administration tried claiming the economy was still growing but the declining figures started in September are pointing to a gloomy future. Economists were cautiously optimistic when the Commerce Department reported that retail sales had climbed in August by 0.04%. However, we have to keep in mind the adjustment for inflation which rose by the exact same 0.04% in September means that consumer spending may be the same but they are receiving less goods for the same money due to inflation.
What are the Exact Definitions of Inflation & Recession, and Which is Worse?
According to Forbes magazine inflation and recession are different but are definitely connected. When inflation rates go up this indicates that a recession is pending since businesses react to the higher costs of production by reducing the production while increasing prices. Now both economic phenomena are bad but according to Jamie Hopkins of the Carson Group, a wealth solution corporation, inflation impacts everyone and a recession affects those unfortunate people who lose their jobs. We had been living with this job issue for a couple of years but only recently have the prices of goods and services skyrocketed due to inflation. In simpler terms inflation shrinks the money and recession shrinks the economy.
Do Recession and Inflation Affect the Supply Chain?
Anyone who reads or watches the news has heard about the issues of consumer debt, the Federal Reserve raising interest rates, inventory overhang, and the impending rail strike among other depressing fallouts due to the declining economy. While just a few months ago there was a waiting list at the ports for shipping containers with intermodal transports working very hard, we are hearing from both retailers and importers of the advent of a shipping decline carrying over into next year.
Salvatore Stile, founder of Wheels Up International, checked out a major unnamed retailer and found that winter goods were missing from the shelves and the summer children’s’ wear were still on those shelves signaling the truth; that there has been a 20% decline recently in ocean freight orders. According to Stile, this is the greatest inflation in the last forty years. Although, initially, it looked like there was an increase in spending, economists are now realizing that the slight growth in the retail data was actual giving a “false impression” about consumer spending since people were gobbling up what they conceived as bargains from stores who had excess inventory that they had to get rid of.
Let’s take the city of Shanghai as an example, to find out what is going on in the price of shipping goods in containers. For seventeen straight weeks the SCFI (Shanghai Containerized Freight Index) has fallen at least 70% from last year. Last year, there were not sufficient containers to bring goods to the United States because there were few containers with exports leaving our ports regularly. Now that is not the case, not anymore in many ports.
How much did it cost to ship a supply container from Shanghai to the West Coast of North America last year? Just this past February the rate was about $8,117 for a forty- foot container and decreased by 80% to $2,097 as of October. The charge for a typical shipping container from Shanghai to Europe last January was $7,797 and the cost fell to $2,581 in October. This reduction in shipping costs is forcing foreign shipping companies to cancel their scheduled trips since it does not pay financially for those ships to continue sailing.
Will There Be a Rail Strike?
There are varied opinions for the reason that President Biden opted to stall the railway workers and ask them to extend their contracts. It was certainly unfair as inflation has increased living costs for all workers. Some political analysts claim that the President is putting off the negotiations with the rail union until after the elections and it is being called a tentative strike.
Union workers say they are disheartened that representatives of their union agreed to the President’s board's proposals since the agreement did little to improve their working conditions until now. If railway strikes actually happen disrupting shipments from ports through the railroads it could be a dead end for small and medium sized businesses. Besides the fact that there would be less goods to sell, the prices would get even more inflated especially with necessities such as food.
A family will always need milk, eggs and bread. In Europe, bread prices are going through the roof because of inflation. Due to the Russian and Ukraine war, wheat in central France has gone up more than thirty percent. Wheat grinder, Julien Bourgeois, who owns a flour mill in central France complained that the cost of his electricity has tripled, and he certainly needs it to keep his flour mill running. He noted that he asked the one thousand bakeries that he supplies with flour to add ten cents to each baguette that they sell. This increase might seem insignificant, but the problem is that inflation keeps the prices rising and rising. Although right now folks are able to pay the additional ten cents for a baguette that was selling for 1.30 euros ($1.27) eventually the middle class will suffer. Even as of this writing butter prices have doubled in one year in France. Mr. Bourgeois cites the memory of long ago when the French revolution began over the price of bread. And who can forget the famous quote, “Let them eat cake”, by Marie Antoinette.
The likelihood of national rail workers' strikes by the major unions is critical. Originally, some major freight companies had arranged a tentative agreement with the Biden administration but now a second labor union has contested the tentative accord and it is doubtful at this juncture how twelve major unions with one hundred thousand co-workers will agree to a new contract so quickly. Not all folks realize that a railcar is four to five times larger than a typical truckload carrying goods across the country and our railway system is an efficient and quick way to ship containers from ports to stores. If a strike occurs, goods, especially perishable ones such as food and refrigerator items will have to be thrown away and many of these goods are not even insured.
If the twelve unions involved in the railway workers do not approve their new contracts a strike could happen as early as the middle of November overlapping the imminent holiday season.
If the strike happens, it is predicted that Congress will have to get involved.
The Federal Reserve Will Raise Interest Rates To Curb Inflation
The Federal government has been battling inflation this year since the prices of everything have gone up. The consumer price index prices rose by 6.6% over the year through September which is a forty- year high. The problem is that if government officials let the inflation rate lurk, inflation will become permanent as in other countries. First the workers will demand pay increases, companies will increase their prices and people may get used to paying more for their goods and fuel. In order to run the rails and other logistic modules a new contract must be put into place before it’s too late.
Loan rates for consumers and businesses have gone up much higher particularly for mortgages. For the average thirty- year fixed mortgage the rate climbed seven percent this week according to Freddie Mac which is the highest point in two decades. Even from last year to this year the hike was doubled! For eight straight months the sales of existing homes have decreased by nearly 25% as well as the decline in new home sales, construction and the weaker housing market is having a direct effect on sales of such home related goods as appliances and furniture. It may take until next spring or summer for the government to take these numbers into account for the inflation index to be noted. We will be having a steady inflation increase but it will not show up officially for several more months.
With the lines of waiting containers getting shorter and businesses getting their merchandise sooner prices should be falling, but Instead prices are steadily increasing in all areas of supply because of inflation. Retailers are getting ready for the coming holiday season, but experts are predicting a fall in sales with some stores not ordering as much as they did last year. People are buying more on the internet, and this is a dangerous signal to mom-and-pop stores who rely on walk-in customers. It’s too bad because shipping prices for supply containers have fallen and this would usually be an advantage for the retailers who must use intermodal transport to get their goods from the Far East. The Feds have been delaying the admission of full-fledged inflation for eighteen months hoping it would soon slacken but as reality sets in the Feds will have to open up more options.