The State of Trade: Slowdowns and Seasonality - Key Indicators to Watch in 2022
Phil Levy: Hello everyone. Thank you for attending today's webinar, The State of Trade: Slowdowns and Seasonality - Key Indicators to Watch in 2022. Before we get started, let's cover a few housekeeping items. On your screen, you will see a sidebar to the right of the main stage. If at any time you need assistance during the live webinar, please message us in the help chat located on that sidebar.
You can ask questions through the Q & A tab throughout the webinar. We'll try to be more diligent than usual and getting to those, your questions will only be visible to you and to our Flexport team. We'll do our best to answer as many of those as time allows.
A copy of the presentation slides will be dropped in the chat and you can find it there. An on demand version of the entire webinar will be available shortly after our conclusion and can be accessed using the same link that you used to get in and they were sent earlier.
Lastly, we want to invite you to register for our next webinar, which is Logistics Rewired Ocean Market Predictions for 2022. And we will drop a link to register for that in the chat.
All right. As usual, we want to keep the lawyers happy, so a brief legal note, please do keep in mind that all information presented in this session is based on the situation at the current time and may not be customized to your specific business requirements. We always recommend reaching out to a Flexport expert to discuss your particular situation.
Phil Levy: Alright, on with the show. I'm Phil Levy. I am Chief Economist at Flexport and I am very happy to be joined today from London by Chris Rogers, our Principal Supply Chain Economist. Hello Chris.
Chris Rogers: Hi Phil. Good to be here.
Phil Levy: Let's tell you what we're all about this time. So we usually offer our take some fairly particular topics and trade who decided to slap a tariff on what. Today though, we're gonna focus on what are some of the driving forces behind trade and behind some of the business pressures that people have been seeing. One of the key lessons that we've seen during the pandemic is that broader macroeconomic forces can have an enormous effect on trade flows.
So we really got three objectives today. We want to talk about the current state of macroeconomic affairs, that's our first topic. Delve into some of the determinants of trade and logistics pressures, that'll be mostly but not exclusively focused on the US. Time is limited, we can take questions about other places as well.
Beyond that, beyond just assessing the current state of affairs, we want to talk and we're going to also do that both through macro stuff, but also through Flexport’s metrics. Where we use Flexport platform data to try and get a more fine grained view of what's going on.
But then we also want to do this in such a way that you're left with tools, that you're left with the ability to track these things, as you get new announcements as things change. Where can you find that kind of stuff? How can you incorporate it? So that's the second big goal was how you sort of track this stuff as you go along. So we'll make reference to that.
And then finally, as a special treat, we want to initiate you all into the arcana of seasonality. Yeah, at first blush it can seem like some really obscure thing that statisticians like to do as a barrier to entry. We're gonna argue that it's not. That in fact, it's important to answer some questions that people might have that what could reasonably have about how the economy is working and what this means for businesses. And looking at it may give us some useful information about the rhythms of business and how those rhythms are changing over time.
All right. And then of course, we will get to Q & A. So that's where we're headed. What we want to do now, before we start, is we want to find out where your heads are. We're going to be talking about all kinds of indicators. But I'm going to argue that a really key one for this next year is going to be what's going to happen with inflation.
So let's come to our first poll here. And I will ask you all, there's no wrong answer. Well, there will be at the end of the year, but there's no wrong answer that we can recognize right now. What is your inflation expectation for US consumers looking forward across 2022? So when we get to the end of the year, when we look back, what do we think the number will be? Okay, we got a whole bunch of you who have voted. I'll invite the rest of you to jump in with your opinions. I'll be arguing a bit why this matters, and why there are some differences over what this should be.
Thank you for everyone who's participated, the rest of you is just clicking the up button. But let's see what you're thinking, before we get into this. All right. Well, we've got, there we go reasonable number of votes, things are evening out. But these are evening out on the fairly high side. And I'll discuss sort of how we see this. Where, so current status, we've got something like the plurality is saying in the four to six percent range, which is kind of where we've seen a lot of wage setting, which is probably not a coincidence, as people are looking forward on this. Got over a quarter saying the six to eight percent range going forward.
If you look at what the Fed is forecasting their forecast, and it will depend on the gauge would have actually been in that two to four percent category. We have an optimist who thinks below two percent. But then there's a sizable chunk here who are thinking above eight percent. So I guess what I take from your responses, and thank you for them, is that there's a substantial amount of uncertainty about that, which certainly sounds right to me, but that the general expectation is for fairly substantial inflation. And I'll argue about why that's a big deal, and why this is relevant.
All right, so let's get into talking about, thank you for all the votes, let's get into talking about where the US economy and where the global economy is now. We're gonna start with the big picture, we're gonna start global. So, let's move on to our first data slide, and here what I'm going to present is actually this is a recent forecast coming from the World Bank. They do regular Global Economic Prospects.
Global GDP Growth
And they say, for the world, for different components, different ways of breaking up the world. What's going to happen with GDP with output. What I think is interesting to see with these patterns? Here we present, you have the world on the left, each of these little bars represents a year.
So this is to show a pattern across time where the first bar, the generally sort of optimistic placid one is 2019, then you see those ones that sort of plunge down for everybody, but China, that's 2020. Then for pretty much everybody but Japan, you see a fairly strong rebound in 2021. You'll note by the way that the 2021 numbers are still estimates, because we don't generally have full fourth quarter data. So we don't know exactly what that is. But these are their best estimates released this month by the World Bank.
But then the last two are what's supposed to happen in 2022, and then in red was supposed to happen next year. There is a general pattern here, that so like I said, except for China, you saw a plunge of some degree in 2020. You saw our recovery and all the Japan in last year. And then that's supposed to moderate for the most part. And there's a reason for that there's an idea that there's sort of a we'll get to this sort of a standard rate of growth determined by what kind of resources does an economy have available. Workforce, for example, and what kind of productivity growth you're getting in the economy.
But this is the general story that the bank is telling when they're looking at what's happening, which is, we just had this rebound growth, expect things to cool off. The story that you can't see on this graph is what the changes are, because the bank makes this assessment regularly. And pretty much everything here is a downgrade from when they looked at this previously, there's an exception or two. But for the most part, they're more pessimistic than they were. So we're seeing a tempering of growth expectations. And hopefully, it'll be a little clearer why as we move on.
Okay, so that's this, if you want to just focus on the US part, which we are going to be doing ourselves, then the actual numbers that go with this were 5.6% growth in last year, 3.7% this year, and then 2.6% next year. So alright, let's get into some more detail about what's going on with the economy.
US Employment
And I want to talk about employment, and then we'll talk about inflation and not a coincidence, those are the two things that the Federal Reserve is statutorily set to target. Full employment and price stability, which usually means low inflation. We'll come back to that. We'll come back to that policy and what they're doing.
People tend to think about employment with things like the unemployment rate, the unemployment rate was just announced at 3.9%. I wanted to show a different take on it with this particular graph. This graph instead of looking at the unemployment rate, which hinges a bit on who's trying to find employment and who's not really trying. This just simply looks and says, out of the entire population of the US in a particular age range and sometimes referred to as the prime age workers ages 25 to 54. How many are employed? And so this moves around all these questions about whether or not somebody is actively trying to find a job.
As a way to decode some of these graphs, the vertical gray bars designate periods of recession, the officially designated recession periods. So the thick one that you see off to the left was the global financial crisis. The strikingly thin one that you see to the right, was the pandemic induced recession, which was the shortest on record.
All right, so what do we take from this graph about the current situation and where we are. Well, one thing you see is that if you look at the experience of the pandemic, it's an incredibly sharp drop in the employment population, that it far exceeds what we had during the global financial crisis. And it's worth keeping that in mind, because we're gonna talk about some extreme policy reactions that are still playing out. Those were responses to an extreme shock that they saw.
The other other things to notice on this are, it was also a quite a quick rebound. That if you look at how long it took to recover ground in the wake of the global financial crisis, that was years. Whereas in a much shorter period, we've regained a large chunk of what we had lost.
I believe the reason we're looking at the 25 to 54, is it's some of the arguments that people sometimes make about how the economy is doing, have to do with were more people retiring was their demographic shift or the like. This kind of controls for that, because then we there's less concern about whether people retiring a little bit earlier.
The last thing to really notice about this graph, is the rebound is partial, that it does not get back to where it was. That has been a key to how people have assessed the economy. To whether they think that we're there, we've recovered, we're all the way or we've still got quite a ways to go, don't let up now. This is I think that's what he's found like this graph, it kind of shows that you can either see this as, wow, really quick recovery, that was great. Or you can see this as ah, I still see a gap there, what where we were at, you know, 81 or something percent before the pandemic.
And right now we're at something like 78, I don't have the numbers right in front of me, you can eyeball it from the graph. That has been a lot of the debate that's been going on in the Fed, is, are there still remaining jobs to be picked up? Or are we there yet, a number like 3.9% on unemployment has traditionally been a very low number. That's what they argue about.
And I think the feeling is shifting a bit more towards where there's nowhere that is, you know, written that we have to get back to the participation number, the employment population number that we had before. But that's what a lot of the debate has been about. Alright, let's move on.
Policy Matters: The Fed and Congress
And I wanted to talk a bit about it. I'd said that this was a lot of what the Fed looked at, like, I don't have a policy, because policy has been a big driver of what's going on. That what we saw, I showed you that very sharp shock that we had, there was a lingering sense that well, first, it was the alarm at the size of the shock and there's a lingering sense that maybe the government hadn't done quite enough in the wake of the global financial crisis to set things right, which is why there was a slower recovery.
So policymakers, at least in the US, were rather determined not to fall short this time. So you saw a lot of drastic measures that were being put in. I mentioned this not just on a historical basis, because I'm going to argue that the theme of what we're going to see this next year economically is going to be, can we unwind some of these things without causing a lot of disruption. So what do I mean by sort of drastic measures? What did the Fed do?
So remember, the Fed is tasked with price stability and full employment, they were pushing for full employment. Levers that the government had at its disposal. They have fiscal policy, they can put money in people's pockets. And they did, you saw two major stimulus bills of trillions of dollars, which were actually remarkably effective, because they sort of put money directly out as opposed to sort of long term spending programs.
You saw the Fed, take interest rates down to zero and essentially leave them there, the Fed funds rate, their policy rate. And then this graph shows one of the most remarkable things of what the Fed did and this actually covers about the same territory that we covered with the employment graph, timewise starting just before the global financial crisis.
This is the Fed's balance sheet, this is looking at assets they have. You'll sometimes hear this referred to as quantitative easing, which is, what do you do if you're a central bank and your main tool is an interest rate? That really you don't want to take below zero? Some people have, but you don't want to. So you get to zero? And then what do you throw up your hands and say, I can't do anything more? Or do you say, I know, I have an idea for how we can pump more money into the economy? What if we go up, go out and just buy bonds? Some of these will be government bonds, some of these will be mortgage backed bonds, but we're gonna buy and as we do, that, we're effectively creating money, that we're not literally but electronically printing it. And it'll be out there. That's what this graph keeps tabs on is, how much did the Fed do this?
So if you look, prior to the global financial crisis, the Fed balance sheet was on the order of 800 billion. And it was really pretty flat, they didn't do that much. You saw this, the whole quantitative easing during the global financial crisis took us up to over 4 trillion, we kind of stayed there for a bit, then you get to the pandemic, and look how sharply this veers upwards. It has a very very steep ascent. And then a fairly steady ascent, which matches or exceeds most of what we saw around the global financial crisis.
This has been the news that you've just had from the Fed about what their new plans are, which is that, the new plan is that by March of this year, that ascent will stop. And in fact, there have been some discussions about what okay, which means the Fed is no longer out there buying $120 billion a month in assets.
And then what do you do with all that? Do you stick with your almost $9 trillion balance sheet? Or do you sell it off? Selling it off, or letting some of these bonds mature is the equipment, is undoing the process is putting on the brakes instead of the gaps that you are. But when you do this money gets taken out of the economy.
This is the discussion about what the Fed will be doing. And I think this will be the big story of 2022. Economically, what's going to happen with this because the Fed has said first, they're stopping buying. Second, they're going to see what they will do on the balance sheet, they may let it run off and decrease in size. And third, they're going to be raising interest rates. There's not a firm commitment to how big each of those raises will be or how many there will be, a lot of speculation now. There'll be three to four this year. How easily will that go down? What will that do to the rest of the economy? That's a big question. All right, next slide, please.
US Price inflation
We got lots to get to. One of the challenges for the Fed is that people often think there's a speed limit on the economy. I said 3.9% was historically low for unemployment. We saw this, what happens if you clearly if you under do what you may have a slow recovery, you have a lot of unemployment. (audio issue) What if you overdo it? What if you do too much bond buying too much physical stimulus?
The general thought is, well, if you push it too hard, you've now you're redlining the economy, it's going to, you're going to have demand exceeding its ability to produce goods, prices are going to start to go up. The concern is that that's what we've got. And here's some measures of inflation. And the inflation scene can be very confusing, because there's not a single measure that we normally think of inflation as you take a basket of goods, you know, different things that represent, say what people might spend, and spend their money on. And then you track what is the cost of that basket?
Well, you're going to get different answers depending on which basket you look at. And that's what we see in this graph. So the one on top is the Producer Price Index, often looking at sort of inputs to production processes that things are often sometimes produced wholesale prices. And that's the one where you've seen if you look at that, you're seeing inflation in the nine to 10% range. If you look at the very popular consumer price index, one review of data, that's what we've seen go into about seven percent, in the most recent data.
One of the reasons there's been a disagreement about whether the Fed has been going too fast or too slow, is that they're often looking at a different index, which is much more what I just said, let's look at personal consumption. What did people buy? So your personal consumption expenditures and you see what's happened to the cost of that basket? So that's the next line, which even so is getting pretty close to six percent.
The number that the Fed tends to look at is the bottom one, which is the trimmed mean, which is to say, okay I know that I've got this basket of goods. But there's always a couple things going haywire. So why don't I just take off the extremes? And I'll just look at that sort of core basket? What's going on in the middle? Is that the right thing to do? That's something people argue a lot about. But that's how you get these sort of very different numbers.
What I will say is, there are some commonalities here of course, they're all trending up, that the trending up, and they're exceeding what the Fed has stated as its target, which is roughly two percent inflation. So they've gone up a lot and this is a problem is particularly a problem, because fed actions to do something about this usually take a while to kick in the classic phrase is long and variable lags. This was exactly this kind of problem which led a Fed chairman of the 1950s, William McChesney Martin, famously to say that the job of the Fed is to take away the Punchbowl just as the party gets going.
And what it looks like for the US is the party is pretty well underway. As they're starting to reach for that Punchbowl, and the penalty for getting it wrong, as you may get inflation embedded. And that was part of why we asked you at the very beginning what your expectations were, because that will also be a big part of the economic story for the year. Is what happens in wage setting. How do people respond to price signals? If you see that a price has gone up seven percent, do you say, wow, that's unusual demand for that product? I should really change my behavior? Or do you say that all prices go up seven percent, you know, that may be less than the norm? How do I react to this? So that's going to be one of the really big challenges.
Alright, that's a lot of the general economic situation, let's start focusing in a bit on both, and how this sort of applies for consumption.
The State of Consumer Demand
And then things which get us closer to things like the logistics craze, which we want to explain. Here, we zoom in, we're not we're no longer looking at, you know, the last decade or so, or more, we're looking at the time just before, during and after the onset of the pandemic.
So what had been that very narrow, vertical bar is now spread out a little bit because we've zoomed in. And what we're looking at is what happened to consumer demand in the midst of all this?
So this is subject to all of this is what is happening to people's incomes, what happened to their tastes, how are they reacting to a pandemic? And I think we can characterize it as they reacted in strange and unexpected ways that there's one line on here that looks normal. And I'll tell you what it is in a second.
So what we're tracking here is what happened to personal consumption expenditures? The stuff that people spent their money on. And that's generally broken down into three parts where it is what do you spend on services, that's by far the biggest part, durable goods those last three years or more, and non-durable goods?
The one line that looks kind of normal here for recession behavior is the services. That you see it takes a sharp, this is all normalized so that February 2020 is equal to 100. So you can check out our percentage changes, but when you see what services, the dark line there is, it drops, as you would expect in a recession, and then it slowly makes its way back. Okay, that's normal. That's kind of what we expected everything to do in a recession. But the pandemic was not a normal recession.
So, what if you look at some of the other lines, you see that non durables initially spiked up, that's gonna be everybody stocking up with their yeast and their toilet paper, classic non durables. But then the real story coming out of that is look what happens to durables? Look what happens to the consumption of durables. It's not just that it rebounds to 100. Which would be to restoring where it had been pre-pandemic, it's that it jumps well above.
So we're getting by the time you got to last spring, you were seeing consumption of durables over 30% above what had been pre-pandemic. So it wasn't a recovery, it was a boom. And that just, you know, actually if it weren't for durables, it would have been quite a story, what was happening to non durables. Because even there you saw these numbers, where it's something like 10% or 15%, above where it had been pre-pandemic.
So that's a big part of the story of what has happened and why we've had so much of the supply chain pressure. Because unlike services, there's a requirement that people either manufacture or transport or move around goods. And so seeing that strong increase, particularly when it was unanticipated, because people thought it's all going to look like services are going to be in a downturn with slow recovery really put on a lot of strains.
Alright, so that's what we wanted to do with these are the numbers you can get from places like the Bureau of Economic Analysis or the St. Louis Fed or the like. We want to see what insight we get from Flexport data, and all this.
So let's move on and see what flex ports metrics can tell us. This isn't, we've been hard at work developing, and we talked about them piecemeal, but we wanted to sort of walk you through each one. So Chris, and I will take turns introducing these.
Post-Covid Indicator: Assessing Consumer Preferences
The first one we'll talk about plays exactly on that indicator that you just saw, where it was how much people swung from consuming lots of services to fewer services and more goods. And so this is something we've called the post-COVID indicator, where it is trying to measure exactly that it lumps together durables and non durables. And then says it scales everything, so that zero is where were we pre pandemic. 100 is where we were right at that initial burst of pandemic behavior, where that summer of 2020, we scale that to be 100.
This was nice, I'll take responsibility for this, this was naively thinking that was the range was going to be in somewhere between zero and 100. Now you can quickly see how I ended up being wrong about this. But and what we do is we have two things here, we have the green line, which is really just a restatement of that earlier graph. This is the data that's put up by the Bureau of Economic Analysis. And it's just translating into this scale. So what you see is consumption tilted towards goods, they have numbers running through November I believe.
The red line is a model that we've developed, which says, there's actually some very interesting information in Flexport data that is relevant for this, that can serve as a predictor. And so rather than stopping with what happened last November, we forecast this out for the months to come. And what is the story that this tells? The story that this tells is, as we look at least into the start of the year, we don't see any let up in this, that you're seeing numbers that are in the 125-130 range. And the precise numbers aren't important to the thing. What we can say is, this is not a return to sort of pre-pandemic buying patterns.
And note, by the way, let's pretend and buying patterns were really really stable. That had been there almost a behavioral constant. There's no sign in the data yet of things moving back. So this is one thing we track and we put this out monthly, usually around mid month and you can find on our website. When this is coming out. Chris, what else do we have?
Chris Rogers: Yeah, so if we go to the next slide.
Trade Activity Forecast - The Road Ahead for US Imports
Clearly, if people are going to buy things, they've got to have come from somewhere, right? They've either been made in the United States, if you're in the US, that's great. But more typically, for a lot of consumer goods, particularly and we've talked about consumers a lot so far. It's coming in from overseas, and it's particularly coming in from Asia. And we've been very much of the opinion over the past well, over the past year or so really. That a lot of the challenges being faced by logistics networks are effectively being created by the demand for consumer goods that's pushing these import flows.
What we did was we created the trade activity forecast or TAF to try and model where imports have been and where they're going to go. This chart is showing you two flavors of our trade activity forecast. We're going to talk about seasonality later on. But really to summarize here, the green line is unadjusted imports. So just literally as they reported as they happened, not trying to change anything about the raw data. And that can be quite useful for folks in the logistics field, because you need to know kind of precisely what's coming and going month to month, you don't care necessarily too much about very long term trends.
But we also look at and you can see some red line in this chart, the longer term trends, this is a seasonally adjusted number. And that's particularly useful if you're in finance or if you're in strategy and you're looking at where the longer term trends are going. Now, needless to say, you know, the direction of these two lines should trend together over time. And of course they have done in the past and we expect they will in the future. And you can see from the red line here that our forecast is very much that imports and this is US imports of merchandise are going to continue to drift upwards at the beginning of this year. So we're not yet seeing that turn around.
So what's the PCI that we showed you the post-COVID indicator we showed you and this forecast aren't part of a grand unifying economic model, they are very much giving us the same picture which is you know, pressure is going to remain for some time. Just give you a sense of context there in dollar terms. It's likely The US imports can remain around 1/5 above their pre pandemic levels through the first quarter of this year. So that demand pressure that's caused challenges for supply chains and for logistics networks looks set to remain around for a little while. Phil, back to you for the OTI.
Phil Levy: Yeah, great. So, yeah that's very interesting, we do see there is just as with the goods. Really, as Chris said, rising above where we were before, not just a restoration of where we had been. Alright, let's look at the next one.
Ocean Timeliness Indicator - Supply Chain Performance
So, one of the, I'm sure that you all have heard and listened. There's a question out there which is, has this logistics crisis peaked? Have we gotten past the end of it? And I heard that somebody got such and such a rate out of, you know Ningbo and that's lower than it used to be, so therefore things must have peaked. What we decided to do was to put together the best measure that we could of, what do you mean by a logistics crisis anyways, how do we know how bad it is, can we quantify this? And can we do it in some kind of consistent way that lets us track? And what we thought the most revealing number would be, would be to look at, how long does it take you to bring something from overseas, a problem that many people face, so let's go from cargo ready date, you know when it's ready to leave the factory to, when is it picked up from the destination port.
And we did this for the two main ocean trade lanes, so this is all for ocean traffic, which is the bulk of moving goods around the world. And so we have the Trans Pacific Eastbound in red, the biggest trade lane, this is from Asia to the United States, or to North America I should say, because it certainly includes places like Vancouver and elsewhere. Then we have in the greenish or the Far East Westbound, so that's Asia coming through to Europe. So, major trade lanes, what are they done? What you see is, at the start, we make sure we take this back before the pandemic, the norms were, just because of geography it took longer to get to Europe than it took to get to North America. And, so in normal time for the total journey for the TPEB getting to North America, would have been somewhere in the 40 to 50 day range, more or less. There's, and obviously there's a movement around depending on the season and what's going on. Whereas it was probably closer to the 50 to 60 day range on the Far East Westbound.
Where are we now? Now we're seeing numbers that are closer to 110. That this is something that we're giving weekly releases, we're tracking. So we are, it's taking dramatically longer, and what you'll see, so a couple things to note on this, as you get to the end, we're not seeing a real lead up. You do see jags from week to week or month to month, there's little ups and downs. But it's hard to look at this overall trend and say, ah we've peaked and things are truly light up. In fact, if you look at some of the earlier episodes of downturns, we'll need a sort of prolonged move down to be convinced that things have really gotten better.
The other thing to note here is, remember I was sort of making claims of, you know geography, and that's why one took longer. What you see here is actually the movement across the Pacific to North America has been harder hit, that in relative terms since it started with a shorter time and ended up with a longer time. Part of that obviously geography didn't change very much, but what is happening is, it takes into account the whole picture. So if you have congestion at ports, if you have difficulty, you know getting containers in and out of ports, that will add to these times, and that was what we wanted to add to these times. So, this is something as I said that we're putting out at the beginning of each week that lets you track, but it's sort of giving a an up to, a relatively up to date take on how long it's taking to move goods. According to this indicator, we do not see a sign of lead up in the supply chain crisis.
Chris Rogers: Yeah, and I think the, one of the important point.
Phil Levy: Chris?.
Chris Rogers: Yeah so, one of the important points coming out of the pandemic is been companies saying, right, we've got these lengthy supply chains that maybe we've set up to cut our costs. But, you know we may need to now review that. And certainly we've had conversations with customers in recent days, precisely to that effect. Okay, I'd rather be closer and mitigate this, but where should I go to manage my, you know if you like my all in costs. If we go to the next slide, we created a cluster of metrics under the title Southeast Asia Sectorial Cost Indices or SEASCI.
Southeast Asia Sectorial Cost Indices - xShoring Drives
Very much recognizing the, there's a demand to understand whether companies should be, nearshoring, onshoring, offshoring, reshoring, I started calling it xshoring, because it does seem that geography is a continual area of review for most companies and within their supply chains. Now what we've done is delve into our data and for products that we can track over time, rolled up to an industrial level, what are we seeing in terms of the relative pricing between different countries importing, excuse me, exporting to the United States, so for US importers.
This chart is showing you price indices for apparel. So this is very broad range of different apparel products, and how the pricing for China, Vietnam and Malaysia has shifted over time. What you'll see here, the green line is China, that's become steadily more expensive as we come through the past few years, we've then seen Vietnam become much cheaper. So that explains why, you've seen some of this switching going on. Malaysia has been something of a dark horse here, where it's actually saw reductions much earlier and has subsequently stabilizing and has maybe even lost some competitive advantage to Vietnam to a certain extent, remember these aren't absolute levels, these are indices and how they've shifted over time. So, Vietnam seen that, that cheapening, but of course, this isn't the whole story, there's a lot of other components that go into a reshoring decision, for example, different labor standards, for example, different product availability, you'll need your suppliers to be certified with various safety requirements and so on as well.
But were tracking this the Southeast Asia Sectorial Cost Indices or SEASCI. And we're actually going to be publishing our latest update to these using fourth quarter data that should be coming out in the next week or so. So more to come on that measure Phil.
Phil Levy: Yeah, that's great. And of course you can track that on flexport.com/research, where you can find updates to all of these indicators that we just put. Alright, it's time to ask you guys another question, and to get your view, which is, we've described a number of indicators here, things that one can watch, there's no single one that sort of shows you what the economy is doing and depending on your business, different ones may be more relevant or less relevant for you. So again, this is subjective, no wrong answer. But which of these of the national economic numbers do you find most relevant for your business? If you're keying off of something you have to pick one. What is it that you look at and say, that's the thing that I'm seeing that gives me a good idea of what to expect. Oh good, you all have strong opinions on this, or at least quick opinions, either we'll take either one. So, let's get some more votes in and see. Right now we currently have retail sales in the lead.
But, and then even, okay, so we got inflation sort of catching up and then GDP growth coming after that. As I said, you know they do sort of relate to one another, that part of the argument that we were making was that, you know what affects an X, but it does help to have some which you think sort of correlate most directly with the things that matter to you. So, alright, it looks like Chris, as they monitor these things, there's a plurality that pays the most attention to retail sales.
Chris Rogers: Yeah, that's perhaps. Yeah, I mean, that's perhaps not a surprise, given the demand has been in the root of a lot of the challenges that logistics networks have faced, so I'm not surprised to see that. Inflation of course all companies want to know, am I competitive? Am I, not just competitive against my direct competitors but all the other things consumers could spend their money on. But, as you mentioned, there's a lot of different things to track, and getting them organized and getting those different elements together is a real challenge.
Perhaps let's talk about some of the things that people can do in that regard. So let's perhaps skip on to the next slide please. So, in fact let's go ahead to the, let's go ahead to the next one.
Introducing The Flexport Logistics Pressure Matrix
Part of what Flexport you know, Flexport reason for existence is to make global trade easy for everyone. And that involves also understanding what's driving global trade levels and global logistics. And to that end, we've started to pull together a lot of these measures into what we're going to be calling the logistics pressure matrix. Now, you're getting a bit of a sneak peek here, the research that underpins this will be coming out in the next couple of days. And then, as Phil's alluded to, we'll be putting all of these numbers on flexport.com/research and updating them as the numbers come through. So hopefully that will provide you a one stop shop. But the research is also going to take you through where all the numbers have come from, why we track them, what they're telling you and where the latest numbers are. And hopefully to that end we can kind of democratize the data tracking process, to a certain extent.
Now, there's been a lot of supply chain stress indices released recently, including one from the Federal Reserve where there's this kind of overwhelming desire to pull everything together and to try and put a single number on it. We're not going to try and do that, I think you're always going to run into issues around combining different data lines, what weights do you use, and so on. So I'm just going to take you through some measures that we look at and that you can recreate as well without being too kind of Bob Ross and painting by numbers about it. This is very US centric, but we are going to be expanding it in due course for global measures. So I'll talk you through a little bit, and we're going to talk about demand side measures, and we're gonna talk about supply side measures.
Consumers, Sentiment Provide the Pressure
This first page that you've got here, we've already flagged that demand has been a key driver of the current woes for the industry, the logistics industry. The left hand charts on personal consumption expenditure, that's the basis of the PCI that we talked about a few minutes ago, that's relatively easy to track from BEA data. Phil mentioned earlier that they've been kind of a stability in the balance of consumer spending and there's been a real big shift in that. We would be tracking this number, and you do need to see a marked downturn from where we are at the moment, not just kind of a little wobble up and down on the numbers, it's very easy not to be critical of our friends in the press, but it's very easy to focus on one month to the next, you know little changes, we need to see a demonstrable move in order to see some relaxation of pressure.
When it comes to looking ahead which there’s two measures in the right hand chart here. It's important to see what industrial buyers of products are thinking about the future and what consumers are thinking about the future as well. The red line in this chart is industrial sentiment for imports gathered by the ISM Institute for Supply Management. And that's still very much in expansionary territory, the dotted line there which is number 50. A number above that level shows that important managers expect an increase in orders, and a number below that dotted line a contraction, and we're still just above that line. So again, we won't see a release in pressure until that line begins to dip below 50 on a sustained basis. Now it's worth bearing in mind of course that expectations and actions aren't the same thing, we'd expected to have our research published already, the action is that it hasn't quite come out yet.
But, it is important to see that intention change. Consumer intentions matter a lot as well. And this is a bit of a curio, we've talked about how consumer spending has been elevated so far. But the green line on this chart is consumer sentiment as gathered by the University of Michigan in their consumer survey. And that number has actually been dropping and is below, its longer term average. So if anything consumers are somewhat pessimistic about the near term outlook and have been for a little while, and that's perhaps not surprising. We're dealing with another wave of the pandemic coming through. Consumers are dealing with quite high rates of inflation, Phil's talked about as well.
But so far, people haven't been cutting their spending in response to that kind of negative feelings. So again, if we see that number remain in negative territory, that might be a sign that spending is going to start to turn over. Let's go to the next page.
Shelf-Filling Strategies Will Matter
We're going to stay with consumer retail sales, everybody seems to, I won't say everybody, at least half of our audience are tracking that number. This is US retail sales, the bars are basically showing you the change in retail sales month over month, green is an increase, red is a decrease. And of course you're going to get a swing from month to month sometimes, but when you see a concerted move red or green, that's where you'll see a concerted shift in spending. And we've seen a series of green uplifts, if you like in retail spending recently, right up until the past month or so.
Now, in terms of what's happening in the future, we also have to take in mind inventories, so you know, are the warehouses that the retailers full or empty compared to where they normally are, and that's the black line. The black line is basically showing that across all retail products, the inventory to sales ratio is 1.05, so inventories are just a little bit more than the sales going out on a month to month basis. Historically, though that's been more like 1.2 times.
So, the retailer is effectively running lower inventories at the moment. If they were going to push back up to pre pandemic levels that would suggest that you're going to continue to see imports, continue to see pressure on the logistics network even if sales began to fall quite quickly. Now, we wouldn't necessarily take it as red, but that's going to happen. It may be that in the retailers say, actually, we quite like having lower inventories not having that cash tied up on our balance sheet. Consumers have tolerated a reduced choice or reduced availability.
Now we'll find out when companies start talking about their earnings over the next few weeks, particularly the retailers what their plans are in terms of inventories, are they going to rebut build, are they going to change their model? We'd hear a lot of discussion about, just in time practices versus just in case practices in the manufacturing sector, retail has similar concepts in place as well.
But again, if that inventory to retail, excuse me, inventory to sales number remains suppressed for a longer period, that suggests reduced pressure on the logistics network for long term. But I think we may actually see it begin to tick up somewhat. Let's move to the next slide.