“Who’s Fauci?”

By Jock O’Connell

One of my abiding complaints about forecasting is that most prognosticators offer estimates that are little more than extensions of the existing narrative. If your port had been growing its container traffic at a 5% CAGR over the past decade, it’s a good bet that the forecast for which you’ll pay dearly will predict that your container traffic will increase somewhere between a high of 7.5% and a low of 2.5% over the next twenty or thirty years. Unless the forecasting firm recognizes a particularly compelling reason to think otherwise, that’s generally what you’ll get.

Now, there are always plenty of things that can go wrong with a forecast. Identifying the sundry phenomena that might conceivably rise up to invalidate a cargo outlook should not be that onerous a tax on forecasters’ imaginations. Still, most are reluctant to journey too far down the road of supposition, let alone worst-case scenarios. After all, too many caveats may trouble bond holders.

The arrival of COVID-19, the novel coronavirus, serves to remind us that there most definitely are “black swans” that can take a serious bite out of even the most well-crafted forecast.

Back on January 10, the National Retail Federation’s Global Port Tracker expected January’s containerized imports to be down five percent from January 2019, with February anticipated to be off by an almost identical 4.9%. March, though, was expected to see a 5.2% year-over-year bump.

Enter the blackest swan the world has seen since Poland invaded Russia in September 1939 (if you’re following the new historical gospel according to Putin).

The Global Port Tracker forecasts were blown apart by the emergence of a pandemic that began in Wuhan, China and within weeks led Beijing to shut down huge swaths of the Chinese economy. The impact was enormous. Official data for the first two months of 2020 reveal that industrial production in China fell 13.5%, retail sales were off by 20.5%, and fixed asset investment dropped by 24.5% from the same period last year.

North American importers, who had planned for the normal disruption in supplies during the roughly two-week Lunar New Year celebrations, were left scrambling for merchandise as Chinese factories remained shuttered. Scores of blank sailings from Chinese ports to North America’s maritime gateways followed.

Not surprisingly, the February 10 revision of the Global Port Tracker’s outlook projected February’s container imports would plunge 12.9% from a year earlier, while March was predicted to be down 9.5% year-over-year.

Even those dismal numbers paled in comparison to what others were saying. On February 28, the American Association of Port Authorities issued this warning: “Due to the coronavirus outbreak, cargo volumes at many U.S. ports during the first quarter of 2020 may be down by 20 percent or more compared to 2019.” That advisory appeared to be consistent with statements by Gene Seroka, Executive Director of the Port of Los Angeles, that his port had been seeing a 25% fall-off in vessel calls.

By the time of its March 9 update, the Global Port Tracker expected that March would see import container volumes plummet by 18.3% from a year earlier. April, however, was forecast to be down just 3.5%. However, given what’s been happening in just the past few days, we should have absolutely no doubt that Global Port Tracker will soon be revising its April forecast very sharply downward.

Yet, what is even more disconcerting than the shocks experienced by forecasters over the past couple of months has been the general tenor of the public discussion in maritime industry circles…up until the day before yesterday.

From the first news of the epidemic’s outbreak, the attention of the industry was intently focused on the disruption of the eastbound transpacific supply chain. Imports were ebbing because the sources of many of those imports were Chinese factories that remained closed due to the virus. The lesson U.S. importers thought they gleaned from this disturbance was that they had grown excessively reliant on a limited range of sources. The result was to accelerate planning for a greater diversification in overseas sourcing and to maybe even entertain the notion of making things in the United States.

Remarkably, the discussion seemed to continue without much reference to the spread of the virus, almost as if a cheap science-fiction drama was unfolding as actors remained studiously indifferent to or blithely ignorant of the toxic threat looming up behind them. People remained absorbed with the things that customarily absorbed them. Importers moaned about tariffs. Exporters of perishables complained about a shortage of reefers. West Coast port directors and editorial pundits continued to fret about their loss of market share, even as the tides of the pandemic were closing in on our shores.

“Fauci? Who the #&%$ is Fauci?”

“Oh, just some nut case over at NIH. One of those Deep-State guys. I heard he’d been a Classics major at Holy Cross.”

Still, as the epidemic in China spread beyond its borders, our attention broadened only slightly. How are factories in China’s Asian neighbors being affected? We accordingly scrutinized every report out of South Korea and Japan and Taiwan and Vietnam, looking for clues about how much the eastbound transpacific trade might fall. (We’d earlier given up on Hong Kong for other reasons.)

Then came news that the virus had somehow arrived in Iran. The disease had obviously found legs or wings. But Iran is an enemy, and so U.S. policymakers had mixed feelings about that outbreak.

The main question on most minds remained how quickly those Chinese factories would be up and running. The big fear was that the ensuing flood of long-delayed imports would overwhelm North American ports and hopelessly clog domestic distribution networks. If ports and transport providers were rehearsing for some eventuality, if they were marshalling their resources to deal with some contingency, it was the prospect that huge fleets of ships would shortly be turning up with massive numbers of laden boxes.

Then the Italians began to fall ill. And then the Spaniards. And within days cases began popping up throughout Europe. As the number of deaths mounted, and publics grew alarmed, authorities embraced increasingly stringent measures aimed at stalling the contagion. Populations were quarantined. Shops, restaurants, bars, churches, museums, parks, beaches were all closed. People were ordered to remain at home or to otherwise minimize contact with others. Citizens unaccustomed to challenging the word of science complied, at least for the time being.

Still missing from the conversation in the United States was any heightened alarm that the epidemic that had become a pandemic that -- by affecting America’s economy in the same ways it had affected China’s and now Europe’s -- would shift the assault on the world’s maritime trade from the supply-side to the demand-side. To many Americans, this was the flu, and the Europeans were hyperventilating.

Then some seniors near Seattle died. And a boatload of cruise ship passengers was marooned off San Francisco. Still, policymakers, especially in Washington, D.C., remained unconvinced that this might be a big deal.

Until someone in power finally started to listen to Dr. Anthony Fauci, the Director of the National Institute for Allergy and Infectious Diseases who has essentially become the nation’s go-to immunologist/epidemiologist.

But by then everything started to change very dramatically. In recent days, U.S. federal, state, and local authorities have begun to impose or, more timidly, recommend steps similar to those now common throughout Europe and formerly common in China. The prospect that the American economy will avert a recession this spring and summer is increasingly dim as consumer spending drops, small businesses fold, major corporations guard their cash, and economic productivity falters.

So, it should come as no real shock that, on March 16, the UCLA Anderson School of Management declared that the United States had entered a recession, ending an expansion that had begun in July 2009. The UCLA economists expect the recession to continue through the end of September. According to their report, the escalating effects of the coronavirus pandemic in March have reduced the first-quarter forecast of GDP growth to 0.4%. GDP growth in the second quarter is expected to slow by 6.5% and by 1.9% in the third quarter. The forecast does not expect normal activity to resume until the last quarter of the year.

The forecast comes with two major caveats. If the pandemic is much worse than anticipated, the downturn will worsen. However, if the pandemic abates quickly, economic growth in the second half of the year will be stronger.

Chiming in in recent days, IHS Markit warns that the United States, Europe, and Japan are all headed for recession this year, while JP Morgan expects the U.S. economy to shrink by 1.5% for the full year and unemployment to rise from 3.5% to 6.25% by the middle of the year.

So here we have it. A disease that emerged on the banks of the Yangtze little more than three months ago and which initially choked off so many global supply chains has now metastasized into a pandemic that will suppress global demand through much of the remainder of 2020.

Announcement: Today’s scheduled symposium on West Coast market share loss is being postponed indefinitely.

Postscript: This commentary is being written from an apartment in Palma, a city of some 410,000 residents on the Spanish island of Majorca. Since arriving here a few days ago from a village elsewhere on the island, we have been under strict quarantine. Venturing out except to obtain food or medicine is prohibited. For the sin of being in the street, cops will challenge you, albeit politely. All restaurants, bars, and non-essential shops are closed. So too are museums, churches, theaters, parks, and beaches. At the grand old Mercat de l’Olivar where we went this afternoon for food, patrons were told to maintain a distance of at least a meter from each other and staff. The same measures are being instituted throughout Europe, and borders are being closed. Our plan to fly home to San Francisco from Munich later this month after visiting family in Zurich is no longer viable because Germany has closed its border with Switzerland. That’s a micro story.

On the macro level, the 1985 Schengen Agreement, which essentially abolished passport controls throughout much of Europe and greatly eased the flow of people and goods, is now in shambles. The moves by several European governments to eschew collective action in favor of individual nationalistic policies aimed at isolating each nation’s population and economy from the impact of the virus now presents a threat to the European Union. It’s a threat much greater than the one posed by Brexit. The future of one of the world’s premier trading blocs is now in serious jeopardy.

How and when we’ll get home is a trivial issue. What’s clear, though, is that with much of Europe a week to ten days ahead of the United States on the pandemic curve, flying home from Spain will be an adventure in epidemiological time travel.

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