Supply Chain Inflation, Trucking Stocks, and the US Economy

Winding down into an Easter weekend, a look that this week at some inter-related but powerful trends driving the economy and supply chains.

Unless you somehow have not seen or heard any news programs in the last couple of days, nor recently visited a grocery store, then you know inflation is ripping through the economy at a scary level and with incredible speed.

Two very concerning numbers this week. First, on Tuesday the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, an incredible jump, and the highest year-over year increase since December 1981.

Some positioned the fact that if you take out food and energy, prices rose a lower 6.5%, as if increases at the grocery store and gas stations weren't the most painful manifestations of rising prices for most consumers. Anyway, this jump in "core inflation" represented the fastest increase since in the measure since August, 1982.

On a month-over-month basis, prices rose 1.2% in March following a 0.8% monthly rise in February, so there continues to be acceleration of price increases.

On the heels of the CPI news, on Wednesday the BLS said wholesale prices rose 11.2% annually in March, the highest increase on record dating back to the start of the measure 2010.

Rising oil and diesel prices were blamed for the wholesale price jump, with diesel surging 20.4% for the month.

Oil prices are certainly a factor, but remember prices for many goods and materials have been increasing since the start of 2021, driven by supply and demand, with "shortages of everything," as the story went. Rapidly rising oil/gas prices simply took rising costs into overdrive.

"Added costs at every step, from production to sales, lead to price increases for consumers, with some companies seizing on a rare opportunity to raise prices," the Wall Street Journal wrote this week.

US labor costs have been rising rapidly. Target stores recently announced wage rates of up to $24 per hour for store and warehouse workers in the most competitive markets.

In fact, US wages were up a strong 5.6% in March - but that was well below the 8.5% increase in the CPI, so workers are falling behind.

Labor forces will want to close or eliminate this gap, understandably, but this can lead to the type of vicious cycle seen in the 1970s, in which rising prices lead to big increase in wages to keep up, which increases company costs, necessitating still higher prices, etc. It's ugly.

Changing gears, it's long been said that freight transportation results and stock prices are great indicators where the overall US economy is headed. These stocks historically decline when lower demand for goods, materials and travel is expected.

If that is true, watch out.

The Dow Jones Transportation Average, which tracks 20 large US companies ranging from airlines to railroads, was earlier in the week down 13% from a recent high on March 29, before a bit of a rally at week's end.

As covered in our supply chain stock index report for the week ending April 8, released as always this past weekend and tracking a number of freight carriers as part of the index, saw a quite a fef sharp drops in share value. LTT carrier Yellow, was down 23%, XPO Logistics was down 12%, FedEx Dropped 8.9%, while UPS fell 7.6%, dropping for 8 straight days at one point, and down a bit more this week.

Many carriers have seen their stock prices fall between 20% and 40% since the start of the year. As one example, normally strong less-than-truckload carrier Old Dominion started the year at $346 per share - and ended this week at $263.

Last week, Bank of America downgraded nine transportation stocks, citing deteriorating demand and falling prices.

According to the bank, "A large number of respondents commented that pricing is declining rapidly, capacity is available, and these shifts could signal a downturn in the economy and lower demand."

Earlier this month, the Bank of America Truck Capacity Indicator, which measures the ability of shippers to find capacity, reached its highest level since June 2020, meaning trucks are readily available.

JPMorgan also cut price targets and earnings estimates on multiple transports stocks, saying "truckload market conditions rapidly deteriorated in the back half of March."

It added "The risk of a freight recession is rising and likely inevitable for an industry where capacity additions always overshoot demand and rates are still near all-time highs"

Nothing is inevitable, but history shows transport companies and stocks are a very good predictor of the near term direction of the economy - so stay on top of what could be quickly changing conditions.

Most of my audience may be too young to even know the term "stagflation" - high inflation and unemployment, as seen in the late 1970s - but I see it starting to show up again in articles on worries about the economy.

The supply chain needs to prepare for the possibility. We haven't heard much about things like forward inventory buys and hedging the price of key commodities for quite a while. It may be time to dust off the old playbooks.

Any reaction to this week's Gilmore thoughts this week? Let us know your thoughts at the Feedback button (email) or section below.