New Flexport report takes a deep dive into post-Covid demand shifts

San Francisco-based freight forwarding and customs brokerage services provider Flexport recently launched a new monthly report, which serves as an economic gauge and shows near real-time changes related to goods demand.

Entitled the “Post-Covid Indicator,” Flexport said that this report leverages the company’s copious amount of data related to the movement of merchandise through the global logistics system as input, while not having as much of what it called a lag compared to government data and statistics. And it explained that is methodology based on an analysis of correlations between detailed shipping data and national consumption behavior.

“Given how goods move, the closest correlations are between shipping flows in a month and consumption a bit later,” said Flexport. “Using the estimated model, we are able to look at more recent shipping data and forecast the consumption patterns that are likely to follow.”

For June, Flexport said that the preliminary Post-Covid Indicator reading came in at 82, noting that a reading around 0 indicates a return to the pre-pandemic norm, in which demand shifts back from goods to services. It added that a reading around 100 indicates continued deviation from the pre-pandemic norm, in line with the goods demand seen last summer. Prior to June, the March, April, and May Post-Covid Indicator readings came in at 133, 114, and 113, respectively.

Flexport explained in the report that the four-year pre-Covid average share of goods is 0, whereas the June 2020-September 2020 average share of goods is 100. The reason for that, it explained, is because in the four years leading up to the pandemic, the share of goods in personal consumption expenditures was very stable, at 31.2%, and it climbed by around 8%, due to Covid-related pressures by last summer.

“Covid-19 created an unparalleled disruption in consumption and trade—in both breadth and volume,” said Flexport. “We don’t have any comparable episodes in history to help guide is, so our predictions are narrower. But in this case, many of the goods that Americans ultimately consume are first shipped through the global logistics system. Watching how those shipments change can give advance clues about upcoming shifts in consumption.”

What’s more, Flexport explained that the rush for goods has been a huge boon to some companies, with the caveat that it has also strained the shipping industry to the point of a capacity crisis that is bottlenecking entire sectors, leaving investors and executives seeing mixed signals, in terms of how to best design strategies.

Flexport Chief Economist Phil Levy provided LM with an overview of the report’s findings and related trends and themes in a conversation, which follows below.

LM: With more people having received vaccine shots, do you think there will be a meaningful shift from a goods-focused economy to a more services-oriented economy?

Levy: To me, it is not obvious what is going to happen next. Switching to services is a completely plausible story, I buy that. But there is an alternate story that is also plausible, which is we form new habits and we do things differently and stick with the new habits. There are plenty of examples of people, just because they have gone through a stretch like this, they keep going. The premise behind this is that it really becomes an empirical question. It is not 100% obvious that with the vaccine we will hit the right levels and get to herd immunity, and we automatically go back to the way we were. But that is really what the premise behind this is in that theoretically, it is a toss-up, but empirically let’s see what the data tells us. The way I would characterize what we have seen so far is that it is not conclusive. We are still much more in the Covid era than we are in sort of the old norm

LM: How should supply chain stakeholders, including shippers, carriers, 3PLs, and brokers, approach the current economic environment, given how freight transportation activity has long been viewed as a key economic indicator?

Levy: We are still in a crazy time, and one of the things we tell clients is “as best as you can, plan far ahead.” But it is hard because we got into this world, which was largely based on a just-in-time supply chain and keep inventories low. We would like nothing better than to be able to, when a client comes in and needs something shipped in a few weeks, accommodate them but things are crunched. And with containers piled up and waiting to come and the Yantian port issues and other things, there is both new goods demand and there are backlogs, and the inventory-to-sales ratio is at near record-lows. We have not yet sounded the all clear…we are launching this index now as a forward-looking thing [tool] where we will get signals coming forward. It is a way to keep watch but for the moment we are still in crazy times.

LM: With the current inventory situation, coupled with things moving towards pre-pandemic levels, does this spell the end of how people not wanting to play this game of managing low inventory levels forever, or are they here to stay regardless of the progress we make in the coming months?

Levy: I think it is like getting caught in the rain without an umbrella and then from that point on you swear you are always going to bring an umbrella with you….and that lasts for how long? Then it is sunny and you are the guy carrying an umbrella on a sunny day and others are frolicking around. At some point, you decide you don’t need an umbrella. There is going to be some of that, in that there is going to be a natural reaction which is focused on getting multiple sources for my supply chain, instead of just one source. It is costly, but I am going to do it. Also, you need to run higher inventory levels, which is costly, but you need to do it. And then over time it is the umbrella inventory theory: “There is a competitor with lower costs than I have because it runs leaner inventories….we have not had a problem for 8-to-12 months,” so I am not sure it is going to be a permanent change in mindset.

What happened is there was a reason we got to those practices in the first place, which is there were competitive pressures and people trying to work costs out of their supply chain. If you ask where I can source something and rank your possibilities 1-2-3 i.e., cheapest/next-cheapest etc., and if you say you are going to multisource, that means you are going to some places you don’t think are the cheapest and that puts on additional costs. It is like buying insurance. That always sounds great whenever you are realizing what you are insuring against, and the rest of the time you say “that is money I am spending that I could get out of my cost structure.”

LM: Is this part of a risk management approach related to things like diversifying sourcing and logistics efforts, in tandem with carrying extra inventory not always being a financially feasible strategy?

Levy: That is correct; we are all risk managing and balancing that stuff off. Nobody would argue that the pandemic has been a regular thing of the sort we have seen in intervals. That’s an extreme representation. I am in no position to know how frequently we will have to deal with this. It is absolutely a risk assessment and how much you are willing to pay to guard yourself against this bad eventuality. This risk management is affecting all supply chain stakeholders for things like how much do you invest in capacity, for example? And you have to make the same bet on the other side, which is if you think this is a permanent move to goods and this crunch continues, well then ordering up a bunch of ships and planes and trucks is a good idea. If you think this is going to subside and by the time all of these things get delivered, and prices are plunging, then it is a bad idea.