A Lot of Supposin’ Goin’ On

By Jock O’Connell

As economists puzzle over which letter of the alphabet will most accurately depict the curve of U.S. economic recovery, port officials across the country are trying to assess how gravely their operations over the next few years will be affected by the rechanneling of global supply chains.

One thing that’s certain is that the cargo forecasts ports have been using to inform their planning and investment decisions have all now gone seriously sour.

Optimists profess confidence in a V-shaped recovery, with a robust upsurge in economic output and commensurate drop in unemployment starting late this summer or in early fall.

That, though, is a minority view. A Bank of America survey of 223 fund managers over the week ended May 14 found just 10% expecting a V-shaped recovery, while 75% forecast more prolonged U- or W-shaped recoveries.

Federal Reserve Chair Jerome Powell thinks recovery will follow a bumpier trajectory, with stops and starts until an effective treatment or vaccine can be found.

The Congressional Budget Office is leaning in favor of a swoosh, a sustained but gradual growth curve that will not bring the economy back to 2019 levels until well into 2022. Still others, like Nobel Prize winner Paul Krugman, think a W is more likely, especially if there is another spike in virus-related deaths this fall or if America’s recovery does not sync with the pace of the recoveries in Europe and Asia. In the end – if there is ever an end to this plague – we may ultimately need Greek or Cyrillic alphabets to chart the economy’s travails.

How will all of this play out down on the docks? The short-term outlook is unmistakably grim. The numbers already in hand for the number of blank sailings scheduled through mid-summer point to months of continued pain.

The National Retail Federation’s Global Port Tracker (GPT) expects container imports will decline 20.4% in May, 18.6% in June, 19.3% in July, 12.0% in August, and 9.3% in September. The GPT forecast takes us through the third quarter, when, as the V crowd believes, economic growth will have already begun to soar.

Raise your hand if you see a disconnect between these respective guesses.

What lurks beyond Q3?

Should COVID-19 deaths surge again this fall in tandem with the start of the normal flu season, it’s an even bet that Christmas – at least for commercial purposes – will be cancelled. At the very least, little Emma and Liam won’t be sitting in Santa’s lap at Higbee’s department store this December.

But enough about the dangers posed by a public health crisis. This is an election year in which the politics of trade policy are poised to make further hash of the coping plans port directors are now busily devising.

Recent statements by President Trump and Secretary of State Pompeo have taken on an increasingly anti-China tone as have the administration’s latest actions against the multinational technology giant Huawei and Chinese companies listed on U.S. stock exchanges.

Presidential advisor Peter Navarro, who seems singularly bent on using the virus to not merely disengage the U.S. from China economically but to isolate China as an international pariah, said on ABC’s “This Week” program earlier this month that “this election will be a referendum on China.” For their part, Chinese officials have stepped up anti-American rhetoric at home while seeking to take advantage of the unsettled situation in Washington to outmaneuver the United States on several diplomatic fronts, including those involving the future of both the World Health Organization (WHO) and the World Trade Organization (WTO).

In short, there is virtually no hope American ports will see any relief anytime soon from the trade tensions between Washington and Beijing that have driven container volumes down.

The prospect of a trade war without end will give further impetus to those U.S. shippers looking to diversify their overseas businesses into newer markets. Two years of tariffs and higher import levies have certainly given importers all the more reason to partner with suppliers outside of China, with countries like Vietnam and India being major beneficiaries of the migration. In 2003, U.S. containerized import tonnage from Vietnam was less than the amount we imported from Nigeria. By last year, Vietnam had jumped into third place among America’s largest sources of containerized imports, ahead of South Korea, Japan, Brazil, and every European nation. (So much for the domino whose fall was supposed to imperil all of Southeast Asia.) China, of course, has remained the top exporter of containerized goods to the U.S. but who is second? The answer is India. Between 2010 and last year, India’s rank had risen steadily past South Korea, Japan, Germany, and Brazil.

The point here? That by diversifying their sources and seeking out new markets for U.S. products, shippers are establishing supply chains that are increasingly handicapping USWC ports geographically. No doubt, this is the logic that informed the recent statement of Port of Los Angeles Executive Director Gene Seroka that “in my estimation” diversification will result in “a loss of 15% of our inbound traffic over time” as shippers seek sources in locations better served by all-water routes to the East Coast via Suez.

This is going to pose some fairly daunting challenges. Like all businesses, ports have numerous financial obligations. Unfortunately, their current fiscal year budgets were all presumably based on forecasts that had predicted growing revenues from growing traffic. Those forecasts have now been knocked off the rails, and dramatically changing circumstances have swept away the empirical foundations upon which those forecasts had been built. Any attempt right down to rejigger existing forecasts would have to contend with the risks implicit in Fed Chair Powell’s recent remark that he has been studying epidemiological statistics closer than unemployment data.

In most instances, American seaports are public agencies operating under the auspices of municipal or state governments. They are expected to be financially self-sustaining. But, especially at those ports that rely for much of their revenue on operations not related to maritime trade – like air travel and cruise ships – the financial threat posed by the coronavirus pandemic could prove existential without bailout funding from government coffers. That, pretty much, was the message in a press release from the Port of Oakland that juxtaposed the port’s public responsibilities as an essential transportation asset with the sharp decline in port revenues, largely the result of a 95% drop in passenger traffic through the port’s Oakland International Airport.

And the San Francisco Bay Area port is hardly alone facing dire financial straits. The Port Authority of New York/New Jersey is currently seeking $3 billion in federal assistance to help offset its virus-related revenue losses.

The current plight of the ports, alas, has not much deterred air quality regulators from pursuing costly new demands that not only defy current budgetary realities but, in the case of California’s ports, further threaten to drive shippers to other gateways, even if doing so increases the volume of toxic emissions being discharged into the world’s atmosphere. (Not our problem, seems to be the prevailing attitude.) Indeed, the sole lesson, it would seem, that organizations like the California Air Resources Board (CARB) have taken from the last couple of months is that the surest way to achieve the clean air goals that CARB has otherwise been incapable of achieving is to shut down vast swaths of the economy.

Disclaimer: The views expressed in Jock’s commentaries are his own and may not reflect the positions of the Pacific Merchant Shipping Association.