When Markets Confound Algorithms

By Jock O’Connell

When recently asked about the prospects for persistently high volumes of containerized imports, the top official at a major U.S. seaport replied: “The containers will keep coming so long as consumers keep buying.”

Admittedly, it was a pithy soundbite. In a world that traffics in glib turns of phrase that purport to connect disparate dots, it was evidently persuasive enough to satisfy the interviewer. Accordingly, there is every likelihood that the port official’s observation has since been digested as though it were received wisdom by the general public and government policymakers.

Unfortunately, the logistical model implicit in the official’s explanation gets the business of importing mostly wrong.

Let me count the ways.

First, as I’ve pointed out before, consumers do not import anything. Sure, there was that “silk” scarf you picked up in Florence last year for your grandmother Philomena in Pacoima. But the fact is that importing consumer goods is the nearly exclusive province of retailers and other intermediaries. As consumers, you and I may go to a store or go online to buy something. But the items we purchase today are, for the most part, available to us only because the merchandise was ordered weeks, if not months earlier.

Using their finest but occasionally flawed predictive models, importers are essentially placing bets on what you and I might buy – or might be persuaded by clever marketing to buy – at some point in the future.

To say that consumers drive America’s containerized import trade collapses time, while obscuring the enormous risks importers bear.

To be sure, consumers are fairly predictable, but consumer sentiment can also shift overnight, even while hundreds of thousands of containers are still at sea.

That’s what we’re seeing right now. Buffeted by steadily higher rates of inflation but also by the grim prospect of a recession that will cost many breadwinners their jobs, American consumers have ample reason for becoming less enthusiastic shoppers. Even if workers hang onto their jobs, their retirement savings are being steadily eroded just as prices of the basic goods they normally buy are spiraling higher. And, in a nation where housing is in short supply, anyone deprived of a paycheck faces the possibility of homelessness.

Not surprisingly, warehouses and distribution centers are reportedly crammed with merchandise that was ordered with high but ultimately unwarranted expectations. Much of that excess inventory will never be sold at retail. Yet, almost perversely, importers continue to flood ports with containers laden with goods that consumers may not be able to afford.

The morale here is that retailers are the agencies placing the orders and driving imports of consumer goods, not the eventual consumers. And what has been contributing mightily to supply chain congestion very much appears to be that retail importers have been more optimistic about future consumer spending patterns than is warranted by the direction the U.S. economy is taking.

So, the boxes will keep arriving in great numbers but not because consumers actually want the merchandise they are bearing.

Second, despite what the monthly trade reports from the National Retail Federation imply, not all containerized imports are retail goods waiting to be snapped up by individual consumers. Those aircraft components arriving in containers at the Port of Mobile are not headed for the local Target outlet but rather a nearby Airbus assembly line. Likewise, exceedingly few imported MRIs and other high-tech medical diagnostic equipment will wind up at Home Depot. While 4.30 million metric tons of bananas were imported in containers last year, so too were 2.67 million metric tons of gypsum. Containers also brought 1.55 million metric tons of new tires for automobiles but also 1.26 million metric tons of tires for commercial vehicles.

The U.S. Census Bureau’s Foreign Trade Division classifies imports as well as exports into some 140 categories according to their end uses. These then are combined into six broad categories. Last year, Consumer Goods accounted for 27.1% of the nation’s $2.83 trillion in merchandise imports. But, as Exhibit A attests, the second largest category was Capital Goods (25.7%), with Industrial Supplies (24.2%) holding the third biggest share. Automotive Vehicles and Parts (12.3%) and Food, Feeds and Beverages (6.4%) accounted for smaller shares, while the ever-popular Other Goods held a 4.4% share.

Admittedly, there is a lot of lane-switching here. Individual Americans consume more than Consumer Goods. They eat a lot of imported food but likely draw the line at imported feeds. They also buy imported tires and auto parts but probably not for school buses or farm tractors. So, there is no reason to believe that all containerized imports are consumer items, even if the NRF’s monthly reports (done in collaboration with the Global Port Tracker) label all inbound laden TEUs as “retail imports” and refer to the nation’s principal seaports as “retail ports.”

Why are end-use distinctions important? Because importers of different things do not all dance to the same rhythms. Importers of retail goods are predicting what you and I might want to purchase – often impulsively – weeks or months from now. Construction companies, hospitals, and manufacturing plants importing capital equipment are usually more deliberative in their purchasing decisions. During the pandemic, firms that managed commercial property such as large office buildings and industrial parks had much different needs than companies that sold desks and chairs for home offices.

Consider Exhibit B, which looks at the real growth since 2010 in the three largest categories of imported goods. The graph is denominated in dollar values adjusted for price changes. As is immediately evident, imports of Industrial Supplies were remarkably steady throughout the past decade-plus. Likewise manifest is that imports of Capital Goods rose somewhat faster than imports of Consumer Goods until last year.

Exhibit C narrows the temporal focus to the months from January 2019 to May 2022 (the latest month for which Census Bureau data are available). As the graph indicates, imports of both Capital Goods and Industrial Supplies were fairly steady throughout pre-pandemic 2019 even as imports of Consumer Goods began to tail off during the last half of that year. The rapid spread of COVID in early 2020 brought about abrupt drops in Consumer Goods and Capital Goods but a sharp spike in imports of Industrial Supplies. From early fall 2020, imports of Industrial Supplies steadied, while imports of Capital Goods and Consumer Goods were more robust and more or less converged in May 2022.

Anyone out there still think containerized imports are only consumer goods?

Third, not all containerized imports are even consumed domestically. Each year, a small but not insignificant portion of all U.S. imports are re-exported without any material change or value added during their stay in the U.S. Last year, containerized shipments of these re-exports (or non-domestic exports) totaled 1,743 million metric tons.

That’s all for this month’s commentary. But the next time you hear someone claiming that consumers are driving the nation’s containerized import trade, exasperation might not be an inappropriate reaction.

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