Consumer Confidence Rises, but Economic Crocodiles Lurk Under the Surface

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--On January 30, a consumer research group named The Confidence Board released a survey saying that their Consumer Confidence Index had reached a two-year high, and that it "rose in January to 114.8 (1985=100), up from a revised 108.0 in December. The reading was the highest since December 2021, and marked the third straight monthly increase."

Indeed, hopes of reduced interest rates as the Federal Reserve meets this week have raised the hopes of many consumers reeling from record inflation rates in the wake of the recovery from COVID-19 shutdowns. And some retailers like Walmart Incorporated (NYSE:WMT) (Bentonville, Arkansas) are displaying price-reduction stickers throughout their stores. This all sounds good for election-year public relations, but analysts at Industrial Info see some disconcerting currents roiling those seemingly smooth waters.

Layoffs in Shipping
United Parcel Service Incorporated (NYSE:UPS) (UPS) (Atlanta, Georgia) is laying off 12,000 workers, which Industrial Info's Geoffrey S. Lakings sees as a necessary adjustment after COVID-19 recovery. "It is likely," he said, "that these jobs were created by people having to order online during the Pandemic, some using the stimulus checks handed out by the government."

He continued: "Now that life is returning to normal and record-setting inflation has raised the cost of goods and services, people are budgeting differently. Basically, they're buying fewer goods." Lakings pointed out that UPS's head count is down overall by 45,000 from its peak in 2021--and that delivery rival FedEx Corporation (NYSE:FDX) (Memphis, Tennessee) has cut its U.S. head count by about 29,000 over the fiscal-year 2023 time frame.

Are Shipping Costs Sinking--or Rising?
A significant factor in shelf prices is the cost of delivery--ships, trains, long-haul trucks and "last-mile" delivery to stores. In line with the layoffs mentioned, shipping costs in some regions had begun to drop over the last year, according to logistics company Freightos.

"According to Freightos data, the rates for shipping a 40-foot container from Asia to the U.S. West Coast have dropped by over 80% since the end of April 2022," Lakings said. "Similarly, prices to the East Coast have fallen by almost two-thirds." As to the cause, Freightos and Lakings agree in their assessments of reduced buying: "One of the main drivers behind this decline in logistics costs is a reduction in consumer spending, which has impacted sales among many importers over the last two years."

But the tide may be turning, based on shipping dangers in the Middle East. Lakings points out that, as ships are required to sail further to dodge bullets and bombs, "it's affecting the entirety of the logistics and pricing of the commodity supply chains." Oil delivery may be especially affected, as some of the world's top exporters are in the region.

Panama's Straits
The shipping industry has been slowed by record droughts in Central America, which have dropped water levels in the Panama Canal's locks to the point that shipping has been greatly restricted. Shippers already were required to choose between waiting at a Los-Angeles-level traffic jam or sailing clipper-ship style around the Strait of Magellan. Either plan costs days or weeks of delays.

These mounting delays could signal a return to supply chain issues, and certainly will be an upward push on shipping costs, a significant part of consumer prices for imported goods.

Shippers may be wishing for the truth of the palindrome, "A man, a plan, a canal--Panama!" because a plan is indeed needed, even if it's to plead with Mother Nature to send rain.

Take Up Your Pallet
Another hidden cost lies in the wood from which shipping pallets are made. Lumber prices are skyrocketing to a two-year high. A surge in construction and in home repair initiated by bouts of cabin fever is thought to be behind the rise in demand that pushed up prices.

"Wooden pallets and wooden crating both rely heavily on access to lumber, and their prices are directly proportional to lumber prices," says international shipping crate provider Crate This. "This is even more significant for international shipping."

So, How Does that Look?
If freight costs do rise due to external factors, it could further squeeze the transport sector, as it will be faced with falling demand versus higher costs. Much could rise or fall in the future of peace or war in Gaza.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).