Q&A: Matt Muenster, Chief Economist, Breakthrough

Logistics Management (LM) Group News Editor Jeff Berman recently spoke with Matt Muenster, Chief Economist for Green Bay, Wisc.-based Breakthrough, an innovator in transportation management, dedicated to creating transparent and fair strategies for the world’s leading shippers. Muenster provided Berman with an overview of steps shippers need to take and consider, relating to inventory management, and the impact of key economic indicators on freight volumes, among others. Their conversation follows below. 

LM: With retail shipment volumes down in February, for the third straight month, based on Breakthrough’s data, how would you describe the current situation, as it relates to inventory management operations and processes, for shippers?

Matt Muenster: In retail, for several months now, we have seen declines in the upper teens-to-20% on an annual basis, for imports, so it is really pronounced. At the heart of this, I think, are a few things. Going back to the 2021-2022 holiday season cycle, we noticed there was a tremendous shift in inventory statistics, which were really showing that retail inventories ballooned over that time period. Of course, we were experiencing really significant freight volumes into the ports, at levels they had never seen before. I think that was fair, at that time, whether we were talking about West Coast or East Coast. What was also true about many of these shipments of goods and imports, in particular, was that the timing was a bit off, because we are still in the midst of a congested supply chain. There was a lot of bottlenecking. The right inventories weren't getting to where they needed to be at the right time, and so we had a really unseasonable build in retail inventories to kick off, or kind of, to end 2021, moving into 2022. And, now a year later, we're still kind of seeing retailers face the consequences of this massive inventory build. Now, it's also been true over this time is just in terms when we're talking about the health of the consumer.

LM: In what specific ways?

Muenster: We've had another year of high inflation rates weighing on consumer spending, especially as they've outpaced their growth in wages, so real wages are inflation-adjusted. Wages are decreasing. This is important, because in in the midst of both a shift in consumption…we’ve been more comfortable for some time, and we're spending more on services than what we did two years ago without a doubt. That is one thing that has consumers spending less on goods, and another is the consequences of an inflationary environment. We have inventories that were kind of mistimed just due to bottleneck and congestion. So, all of this, both from the supply and demand side creates this situation where inventories are quite elevated. We have seen the peak in retail inventories looking at their absolute levels, with August 2022 looking like the peak in inventories. It's come down, but it's still considerably higher than what would be a kind of a normal year-over-year change in inventories.

LM: What can consumer demand shifts imply for the freight demand in 2023, when looking at how things like inflation and elevated retail inventory levels impact things?

MM: Excellent question. From a big picture, in freight demand, we think that freight demand, for the level of shipments in the marketplace, will return to 2019 levels on average this year. We've already seen a lot of movement, and whether you're calling it normalization or a return to pre-pandemic levels, we are just seeing, in general, freight volumes coming back to that point. We are way off the 2021 and 2022 peaks, and, at this point, are much closer to the 2019 experience. It is our forecast for what we can expect in 2023, and I tend to agree. I am a member of the National Association for Business Economics, and on the transportation roundtable, there are forecasts and market outlooks that are produced from this group of economists regularly. In its most recent outlook, it is certainly the consensus that the first half of 2023 is expected to be weaker than the latter.

LM: With a fair amount of mixed economic signals, including employment, manufacturing, and services, how does that work, or play out, in terms of shippers and providers collaborating, or being on the same page, as it relates to these types of shifts?

Muenster: Every experience is going to be different in the market. There is a lot of noise in economic indicators right now. Generally speaking, we are aware that GDP is down, rates and inflation are up but after that it gets a lot more complicated.

LM: In what ways?

Muenster: With rates being as elevated as they are, we are expecting some measures of economic health, like housing starts, to be well off the pace at which they were a year ago. That gives particular guidance to a host of retailers, especially in home goods markets, as the perception is they are going to have a slowdown in sales that seems straightforward, given the rate environment. We also need to remember that the durable goods experience over the last couple of years is different from the non-durable goods experience. And many of those supply chains are still recovering gradually, in terms of perhaps inputs to finish goods. The automotive supply chains have been front and center in respect to that. At first it was semiconductors we were talking out and then it’s some other part of a finished vehicle that probably just in 2023 enables the new vehicles returning to market and getting back to some semblance of normalcy. So, in terms of how shippers can proactively move behind these consumer shifts, it really comes down to their leveraging data to do so, and understanding what's going on to those in the market around them. Because there is such imbalance, for we've seen really low retail freight demand. But perhaps other industries have been more resilient and knowing what is going on with other shippers around them. Perhaps that creates an opportunity for them in the market and how are they choosing to source their truckload capacity. In this 2023 market, we're seeing demand decrease more rapidly than we're seeing a change in truckload capacity. Meaning, to this point, we're seeing long distance trucking employment hold up. You're still seeing some steady growth there. We know that those businesses want to retain their truckers, and their employees. So, where demand is decreasing and supply remaining resilient, it's providing shippers with some opportunity to use data and information, whether it's around cost service even more and more sustainability focus on who do they want to partner with to move their goods to market.

LM: It is fair to say market conditions have been pretty different for the last three years. That said, how would you sort of address how shippers are, or will be going about managing inventories in 2023, and beyond? Obviously, you have to know your audience to a large degree but it also seems like shippers will be better prepared based on the lessons learned during the pandemic. Also, what do shippers need to be focusing on as it relates to being adept at managing inventories now and into the future?

Muenster: I think a couple of trends stand out over the last few years. It's really about asking what's sticking in the market, because there's a shock part to the pandemic and the aftermath, the bottlenecks congestion all of that. But much of that goes away. So, what are the trends that are going to be lasting? I think there are a couple of things. First, inventories are going to be moved closer and closer to the customer. I think that's become a focus for so many businesses, whether we're talking about retailers or otherwise. It also helps mitigate risks in some respects that, leaving less distance between your supply chain, your customer perhaps, leaves less room for it to be disrupted. Another sticky trend is that geopolitics made supply chains far more complicated than what they were five years ago.

LM: Why do you think that is the case?

Muenster: This comes down to commodities. The furthest part of the upstream supply chains and energy, something that moves throughout the supply chains. Obviously, implications from Russia are having a profound impact there. But it also questions shippers’ willingness of how much exposure they want their supply chains to have abroad. And I'll be the first to admit that I didn't think there would be as much traction in re-shoring and nearshoring like there has been. But the geopolitical arena has given that more of a charge, and what I would have first thought imaginable back kind of when the trade war started. As an example, we had a toy manufacturer client move its manufacturing operations into Mexico. I think a lot of it was attributed to the fact that both maritime and air freight rates blew up over the past few years, to an unsustainable level for them.

LM: What are some other factors for this shift, do you think?

Muenster: Automation is playing a massive role in it. A major reason cited by companies for moving manufacturing back from abroad had to do with the extreme differentials in the cost of labor, while as robotics and other automated technologies continue to replace that gap that makes it more feasible to bring production closer to the end consumer—and companies are going to be keen on doing so.

LM: What do you view as the main logistical challenges in managing shifts related to inventory levels?

Muenster: Strategically, it makes shippers reconsider where they are keeping inventory and how much of it, perhaps, is going into one central location. For example, if you have one massive center that's collecting all of your West Coast imports, it may have gotten to the point in which your inventory was so disrupted that it slowed down the rest of your business because you had one focal distribution hub, and all of your risk kind of compounded because of it.

LM: Are there things you are hearing from your customers that ring true across the different industry verticals you serve? In other words, are your retail shipper customers experiencing some or any of the same difficulties as your automotive shipper customers? Are there underlying under connecting or underlying themes that they are looking to address or improve upon?

Muenster: Yes, they're all impacted by some disruptions…like, for example, labor disruptions. They're all very concerned of what will happen at the port. They were all very concerned of what was happening at the railways to end 2022. And some of that has made them reluctant to put more emphasis into those parts of their supply chain like right. Right now, I think there's general reluctance. It's a combination of what occurred at the ports. It's a combination of the broader regulatory environment. But we are continuing to see a shift in volumes from the West Coast to the East Coast, and those disruptions will have a hand in that, as well kind of hedging there any sort of risk they may continue to linger from a labor disruption. That's really important. That's something that crosses over it. Doesn't matter what kind of good you're trying to move. That crosses over form shipper to shipper. The railway disruption is another important factor. But for the railways, it really wasn't just about the fourth quarter of 2022. It has been a longer-term deterioration in service that matters to so many of our clients. This is a challenge. They'd love to be able to grow their intermodal volumes. I think railways would like to have it. It's going to need to replace their revenues that are coming from other places like coal, which, for them, has received a bump especially in the last year, with the energy prices. But that will eventually go away. We're all not naive to that fact unless carbon capture really takes off. I suppose there's always kind of that asterisk. So, there's no escaping that shipper to shipper. They'd love to be able to grow their volumes intermodally, for one. It's the quickest way to reduce emissions on the movement of transported goods right now versus the over the road truck. But the service levels need to be there, and it just hasn't been the case.