Will the bullwhip do the Fed’s work on inflation?


The only surprising thing about the slowdown in the freight market is the speed at which it is unfolding. The supply chain “whiplash effect” is both predictable and expected. Soaring inventories and falling freight cost/capacity imbalances will be deflationary.

The trucking market has slowed. Truck demand typically increases in the spring, but this year truck freight demand has broken from that typical seasonal pattern.

Outbound Tender Volume Index (OTVI) is an index that measures the volume of truckload order inquiries in the contracted truckload market. The OTVI chart shows year-over-year activity from 2018 to this year.

The bullwhip effect is something every student of Supply Chain 101 learns – the idea that upstream suppliers overproduce in response to a one-time demand shock.

What is the whiplash effect?

According to the Chartered Institute of Procurement and Supply, the bullwhip effect “is defined as the distortion of demand that propagates upstream in the supply chain, from retailer to wholesaler and manufacturer, due to the orders which may be higher than sales.

The best way to think about this in terms of COVID is that at the start of the cycle, the Federal Reserve was pumping billions of dollars into the economy to make sure the market didn’t crash. Consumers went out and spent all that money on physical goods. At the same time, production in China and the United States was stopped or limited. The combination – boosting consumption but limiting production – caused the American consumer to run out of almost all of their stocks.

Retailers ordered more goods based on the inflated demand at that time. Upstream of them, wholesalers and manufacturers have done the same. Along this chain, some even ordered stock bumpers.

When orders did not arrive as expected, they ordered more. And upstream, sellers also ordered more for the same reason. As orders poured in, everyone started producing at unprecedented levels.

Consumers, hungry for excess cash and optimistic due to high employment and a booming economy, continued to order physical goods. Then the products started pouring in, and despite the delays, they poured in.

Earlier this year, consumers retreated… slightly at first. But all these products continued to flow, as well as the buffer stock. Warehouse inventory has piled up. And now consumers have moved away from consuming physical products and back to consuming services and experiences. Meanwhile, all that inventory keeps coming.

And now we can see these goods in market data. Below is a chart of actual retailer inventory, excluding new or used automobiles. Because inventories are counted based on their dollar value, rapid inflation can cause inventories to appear artificially higher, so remember that these numbers have been deflated by the Consumer Price Index, or CPI. In other words, inflation has been eliminated to reflect “true” growth in inventory volume, not just price.

And as goods flood into our economy, there is nowhere to transport them. Warehouses are full and spending on goods is at a standstill as Americans suddenly have more options. Freight demand therefore slowed.

Inventory at very high levels

FreightWaves’ editorial and research staff, along with its market experts, conduct ongoing channel checks. Lately, we’ve been hearing that national big-box retailers have plenty of inventory, especially in large discretionary categories, like furniture and housewares.

On Twitter, where freight markets are suddenly becoming a hot topic of discussion tied to economic activity, there are hints that other major categories of consumers are also experiencing a sudden downturn.

Used cars have been nearly impossible to find and have seen unparalleled price inflation over the past two years. That could change.

Bloomberg’s Joe Weisenthal reported that used vehicles saw the biggest price drop in two years.

This index of the value of used vehicles seems to be reversing.

The CEO of a chain of used car dealerships maintains a blog that discusses trends in used cars for the general public. On Twitter, he frequently talks about market conditions. On April 9, he posted:

This was followed by Quant researcher Steve Hou, who posted:

Lumber prices are also down, after two years of inflated prices and extremely tight supplies. Over the past month, commodity lumber prices have fallen from $1,252 to $949 per thousand board feet, a 30% decline.

A shift of consumers towards services

Rising energy and food prices likely caused the consumer to reduce spending on physical goods – as retailers desperately restocked – just as consumers finally began to shift their spending from physical goods to Services. And without a request, you don’t need to move anything quickly.

Shippers feel much less urgency and therefore slow the freight speed of their supply chains. We can see this in the volume changes between the modes of transportation they use. Railroads move products more slowly, including intermodal (containerized freight on rails). It is currently 21% cheaper to move a freight container intermodal than by truck (door-to-door) – an unprecedented saving.

Graph: Intermodal vs Truck Cost Delta Percentage

The graph below shows volume trends in intermodal and full truckload. Intermodal is holding up, while truck volumes are slowing.

Chart: 53 feet. rail containers vs truck volumes

This is all good for consumers – freight prices will go down. Supply chain bottlenecks will ease. What was recently a shortage of inventory is now a glut and will likely lead to price reductions, not increases. This is a late supply chain fix.

The trucking industry, especially small trucking companies, will eventually feel the effects. But it was inevitable. A freight recession occurs much more often than a GDP recession. The last time this happened was in 2019, when the freight market experienced a downturn, but the wider economy did not.

I think a freight slump is inevitable and I think inflation needs to calm down. It would be either the Federal Reserve to do it or the market to do it. We can thank the supply chain boost for doing the job of the Federal Reserve.

China’s latest round of system-wide shutdowns could be the final straw that has many supply chain executives in America reassessing their sourcing strategy (if they haven’t already). fact). China is becoming far too unpredictable and unstable as a supplier. Importers should take this break to catch up.

There are still plenty of reasons to be optimistic. The “whiplash correction” will be a different kind of headache than what we have had to deal with over the past two years, but the good news is that the market is correcting itself and things are “normalizing” – at least as far as supply chains are concerned. concerning.

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