Justin welcomes Jason Miller, Interim Chairperson at Michigan State University for the Supply Chain Program. Jason speaks to Justin and Jay about national statistics and how he goes through looking for insights into the supply chain and logistics industries.
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Highlights
- Jason Miller’s background and experience – 2:45
- The supply chain and logistics industry today – 7:40
- Consumer Spending – 12:00
- Safety inventory leading to volatility of demand and lead time – 15:20
- What is impacting the labor market – 20:00
- Trends to look out for that could indicate a recession -33:00
- Dealing with labor and material shortages – 38:00
Episode Resources
Connect with Jason Miller
Connect with Jay Tanjuan
Connect with Justin Smith
- https://smithcre.com/
- https://www.lee-associates.com/
- jbsmith@leeirvine.com
- https://www.linkedin.com/in/justinbsmith
Justin Smith: Hi everybody, it’s Justin Smith, Lee & Associates. I’m excited to bring to you the latest episode. It’s with Jason Miller and he’s a professor at Michigan State. His specialty is supply chain and logistics. He is going to talk with us about all of the national statistics that are available and how he goes through looking for insights into the supply chain and logistics industries. So that when you read sensationalized headlines and you’re not sure what to believe, he delves into the data and gleans context into what’s going on in the industry and shares it with us. I’m very excited to bring this to you today. I hope you enjoy it. So, Jay’s not my partner in crime. He’s like my de facto co-host. He’s on the developer side and follows things closer than I do. He’s incredibly knowledgeable and experienced. I figured a better person to have. Someone who’s thinking about things from the development side. And then for me, I work companies that use warehouses space. So manufacturers and distributors and 3PLs. And then I’ll do some work for developers like Jay and just for the high net worth crowd, that own property and will be leasing it or will be exchanging into larger properties. So it’s all industrial all the time.
Jay Tanjuan: Jason, I’ve been following your LinkedIn posts pretty religiously over the past year or so. I’ve been a big fan of just your outlook on how you approach things. That’s really, I think I got that idea like, “Hey, Justin, it would be great if you had Jason on and here his perspective.” A lot of stuff’s been happening, especially over the last few months that have affected our industry, as a result of supply chain and logistics. Which is obviously your expertise. I’m really excited to hear what you have to say. And I’m a big fan, so it’s a true honor to have you and share this time with you.
Jason Miller: You’re far too kind there Jay, way too kind.
Justin Smith: We don’t know how many fans there are in this fan club, but you got two more.
Jason Miller: You guys are far too kind.
Justin Smith: But who’s not in the room with us that is a player in our space is wall street. A lot of institutional money goes into industrial properties. So that’s interesting to think of. They may not look at it with as fine-toothed comb as you do, but I imagine there’s a lot of people that are betting really big on industrial. And so all of this plays into it. So I’m, mindful that some of people who listen to this will be, the capital markets and some of the investors in that world. So that’s always helpful just to give you one more perspective of people that are in the audience that are listening.
Jason Miller: Gotcha.
Justin Smith: Tell us more about your program, your role, and just to set the stage a little bit about who Jason is, where you’re coming from and where you go to work every day.
Jason Miller: So I’m right now, the interim chairperson here at Michigan State in the Eli Broad College of Business for the Supply Chain Program for the next couple years. Before that I was one of the tenured faculty members. So now I’ve got some additional administrative responsibilities, teach a little bit less than before.
Jason Miller: So the academic research side, none of you all ever see any of that because we write in a very interesting manner as academics. So I don’t really talk about that side much. That’s still where I spend most of my actual day job. But a lot of the content that I really focus on really from a teaching standpoint, as I’d say connecting, a lot of economic data that really is supply chain data and trying to essentially approach what is going on in industry through the lens of what data do we have available. And it’s tying together various different sources and construction data being a very important piece of that.
Justin Smith: Yeah, I had just finished Peter Zeihan’s book, The End of the World is Just the Beginning, and it was about some form of deglobalization. His whole book at the end, there was like a closing chapter, like in acknowledgements about the bureau of labor statistics and how helpful they were and how much like he relied on them and their team and back and forth. That’s something that I think a lot of people don’t rely on or that’s not their space to go there to look for that. That seems like that is your role or that is one of them.
Jason Miller: It’s turned out to be a very different way of teaching. And I’d say a very rewarding way of teaching because it just forces you to focus on, really staying up to date with what’s going on. I think one of the challenges that academics can have been they get lost in the nitty gritty of the research that they’re specifically doing, and they can lose touch with what is going on in the broader business setting.
Justin Smith: Then the people taking your courses in a program, these are grad students in the supply chain management master’s program, undergrads, or other cats looking for doctorates or who’s the general people that the program is for and your classes in particular.
Jason Miller: Yeah. So undergrad, we graduate 350 majors a year in supply chain. So we’re one of the larger programs. I used to teach some undergrad, now with the transition to chairperson, I don’t anymore. I teach MBA, a course called integrated logistics systems to the supply chain majors in the MBS program. I teach a distribution fulfillment course in our online Master of Science in Supply Chain, which is a hybrid program. It’s aimed at folks with bachelor’s degree and then a couple years work experience in the supply chain space. Primarily delivered online because we’re expecting folks are going to be working the entire time they’re going through that program versus with the MBA, which is full-time.
Jason Miller: And on the PhD side, I do supervise a couple of our PhD candidates, meaning they’re through comps or working on dissertation. One thing I tell anybody out there, if you are thinking of getting a PhD is the PhD is designed for you to stay within academia. It is not designed at least in a college of business standpoint to be really applied in the workplace. It’s to train you to be a researcher, which anymore means being a statistician and being a computer scientist. And so my day job is primarily being an applied statistician when it comes to that.
Justin Smith: I imagine you don’t have many brokers then coming through the program looking for PhDs. Have you met any PhDs out there?
Jay Tanjuan: Not at all.
Jason Miller: It’s very different in Europe. It’s very common. You’ll see a lot more folks get PhDs, but the European university system and the job market is just different in the US in that regard.
where we are at today, September 1, 2022. I figure everybody’s using COVID as a milestone of before, during and after, depending on what words you use to describe where we are at now. Jay and I have seen ridiculous amount of absorption, of development, of an increase in the value of, and in the price paid for space and just the amount of space that people have taken. And then, this summer was all about the fed and interest rates. And then was it going to cause this great repricing where people no longer saw as much value in industrial property as they did before? Lo and behold, all the value didn’t evaporate, but it caused a lot of people to be concerned and take like a real hard look at their assumptions and to start to make adjustments. Such a great time to be alive and so much going on, maybe from your perspective, where are we at in the supply chains and logistics industry?
Jason Miller: It’s hard to believe right now. Just thinking about it. September of 2022, it means we’re 30 months, at least for the US into COVID right now. We are two and a half years into this situation. It’s almost hard to say this, because if you look last year at this time, we would’ve been talking about the fact of warehouses having slower throughput than desired, trouble scheduling labor, railroad inefficiencies starting to cause bottlenecks and last year would’ve been incredibly high trucking prices that keep going up. This year we have warehouses much more full with inventory. We still have labor scheduling challenges. We still have the railroads not operating very efficiently. We still have a tremendous number of container ships waiting offshore to unload, but it switched from last. So last year, everything was really on the west coast, in Los Angeles, Long Beach. This year, it’s the east coast and the Gulf coast because of retailers and other importers routing more of their freight through the Panama Canal are going, essentially the Western route through the Indian Ocean and across the med and the Atlantic.
On that side, not really much has changed. Probably the biggest change has been a dramatic cooling of the truckload spot market, really over the last six months. The recessionary concerns while they’re there, there just doesn’t seem to be any evidence yet from a labor market standpoint that we’re close to going into a recession.
Justin Smith: Yeah, what worry that has been right. Of everybody thinking and talking about that. And it’s funny to think of with data, how real time versus delayed it is to know when you can know.
Jason Miller: No, I think that the availability and I think just in, in general, the data literacy of the business community has increased tremendously really over the last two or three years. And I think in some ways it’s been wonderful, because it’s easier to have these conversations, but there has been, I think, a danger to it. That danger comes because many folks who have become more literate, they still are not experts. And so they’ll see things like, oh, my heavens GDP growth has been down two straight quarters on a seasonal adjusted basis. That means we’re in a recession. No, that’s not how we actually call recessions. Really, the biggest thing that gets looked at is the labor market. And we’ll have more data coming out tomorrow morning, on Friday for the August labor data. And I think that’ll really paint a picture, but we saw evidence that job opening rates were still incredibly elevated at the end of July. Quits were very elevated at the end of July. We just aren’t starting to see evidence yet of this labor market substantially cooling down. So, I think the fed will be watching that very closely as they start thinking about the next decision with interest rates.
Justin Smith: Jay I’m so used to the one man show. So by all means just anytime you’re feeling it or thinking it, let it rip. Don’t wait for me to call on you.
Jay Tanjuan: Jason, in our world we’re building industrial buildings and that is all driven by tenants and tenant demand, which comes from consumer spending and consumer demand. I’ve followed your post recently, about consumer spending still maintaining or holding from, pre pandemic type levels, which I think is really key for us as we’re moving forward. There’s definite economic headwinds up ahead but if consumer spending still continues to hold. I think that still bodes well for our industry, especially in Southern California, where my focus is, because we have, the ports of LA and Long Beach, which, brings in up to 40% of the goods coming in especially through Asia. So all that stuff needs to get stored somewhere and so it’s going into to our warehouses in Southern California. Which as a result and accelerated by what’s happened with the pandemic has really made Southern California industrial just really boom in the last couple of years especially. So really the last 10, 12 years but more so in the last couple years. So curious to hear your take on consumer spending, you mentioned the labor market’s still strong and kind of touch on what you see moving forward as we close out 2022 and into 2023.
Jason Miller: So I think that one of the things that’s been surprising to me is there was this strong belief when you looked at how stable spending patterns were before COVID, I think we all really thought there was going to be a quick snap back in 2021, once we had widespread vaccination. Away a little bit from goods, more towards those discretionary services. So going on vacations. Well, we certainly have seen that. Essentially that share of wallet shift back towards the mix. It’s really only about halfway to two thirds the way back give or take. So call it two thirds the way. So really right now, it seems that we’re still very good centric. Which explains why we still are seeing record import levels even with high inflation zapping some consumer buying power. And part of that again, is some of the retailers did over order. But at the end of the day, we still head back to school. We still are going to have Christmas. That’s not going to change. People may pull back a little bit, but they’re not going to stop buying.
Jason Miller: So consumer spending, when you look at credit card debt, it’s not at record levels yet. And then when you look at credit card debt per account, it’s still well below pre COVID levels. So we’re not seeing credit card defaults and delinquencies increasing substantially. We’re still near record low levels and we’re actually below where we were before COVID. So we’re just not seeing those signs yet that the consumer has reached a breaking point on the consumer spending side.
Jason Miller: I was just literally pulling up, total construction spending because the data just came out for July. And year over year, now this isn’t adjusted for inflation, and this is specifically for commercial real estate, which the census bureau be including any type of retail outlets, but also warehousing in that. The value of construction put in place is up 13% year over year. Obviously, some of that’s inflationary, but we’re not starting to see a sharp slowdown yet in that commercial side. Same way with, for example, construction spending on manufacturing facilities. We’re not starting to see a substantial slow down yet. And so I think what we’re going to be saying, especially as we move, through this year into 2023, is yes, that consumer spending mix is likely to shift a little bit back towards pre COVID. Which is going to put us heading towards those long term trend lines. But on the industrial side, things do seem to be faring reasonably well. We off shored everything that we were going to offshore, two decades ago, right before the great recession and or during the great recession. So we don’t have a concern from a manufacturing side. There’s going to be this wave of offshoring activity again. If anything, we should actually see a net benefit from either near shoring to Mexico or true reshoring coming to the US. And I think given all the disruptions Europe’s faced and their natural gas prices are 300% more expensive than they were last year. That while it runs the risk of putting Europe in a recession, as companies are thinking facility location. It sure makes North America more attractive opportunity given essentially our much greater level of energy self-sufficiency.
Jay Tanjuan: Jason, a lot’s been made about the shift from just in time inventory levels to just in case. Do you see that as a longer term trend? Because for us as industrial developers, the just in case model is actually beneficial because now retailers need more warehouse space to store all the product that they potentially may need so they don’t run out of line items on shelves at stores. So, curious to hear your thoughts on that kind of moving forward.
Jason Miller: I don’t know where the just in time versus just in case terminology came from. But I’ve never liked it because while it sounds nice, it’s hiding what really is happening. Companies are just reparametrizing safety stock. So to me, I don’t even make this just in time, just in case distinction. As I’m thinking about it, it’s okay when we set safety stock, we worry about volatility of demand and volatility of lead time and the length of lead time. Well, we’ve got longer lead times more volatile lead times, and demand has been more volatile. All three of those pieces together are going to increase the amount of safety inventory we have. Especially for your fast moving A items. The biggest thing is the volatility of lead time is the most important driver. So my view is yes, we have seen safety inventories increase in some instances where it really showing up right now is actually in the raw materials that manufacturers are holding. Which makes good sense because the price of stocking out a key ingredient, shutting a plant down is in the tune of tens if not hundreds of thousand dollars an hour. Long term, I don’t see how the in the justification will be made. We can see how wall street has hammered Walmart and Target for having their days to turn inventory be higher. And so I don’t see how this investment case will be made of, we should have additional safety inventories relative to before COVID just to hedge against this uncertainty. I think long run that won’t happen because there’s just too much pressure for cost cutting.
Jay Tanjuan: You mentioned Target, they’ve been in the headlines a lot recently. As you noted, they slashed their prices to get rid of this excess inventory, which hurt their stock price. But it seems it may have been as you’ve noted in some of your posts, that may have been overblown a bit. Because I haven’t really heard of many other retailers having some of those issues. So curious to hear your thoughts on that as well.
Jason Miller: Yes, when we’ve seen the inventories issue, it’s really been isolated to a few sectors, general merchandise being the biggest one. So Walmart and Target. Costco has had no issues whatsoever but that’s a very different sourcing model, far fewer stock keeping units. So a little bit easier I think, avoid the over-ordering issue. We’ve seen it then, a little bit, actually right now in building materials, with the slowing of the single family housing market. It didn’t get that much attention, but Home Depot is sitting on a lot more inventory than the norm at this time of year.
Jason Miller: But on the other hand, clothing retailers are still in general, fairly lean, because demand for clothing’s been so strong. The biggest sector of retail trade in terms of inventories is auto dealerships and they’re still incredibly lean, compared to where they would normally be at. And so I think that Walmart and Target have received a lot of attention. I mean, my contention always was that the need to rebuild inventories, wouldn’t be a dramatic thing that would cause prolonged demand for freight. Conversely, the need to slash inventories isn’t going to be something that’s suddenly going to cause ocean import volumes to fall very steeply. It really is all about what is that demand picture. And while demand may be moving sideways from last year. It’s still well elevated above where the pre COVID trend line would’ve put us at.
Justin Smith: Sounds like more balance.
Jason Miller: Yep, and I think this is the thing is, we’re coming back into balance that year over year growth isn’t there and that makes people feel I think almost this extra sense that things are slowing because last year at this time was just a completely unnatural heated economy. And so we were never going to keep pace with the growth rates that we were seeing last year at this time.
Justin Smith: Yeah, I don’t think I can drink enough coffee to keep up with last year’s frenetic pace. And then I think of anyone looking for a building in Southern California, there used to be, you could go to the Inland Empire or between LA and Orange County. And depending on your strategy and your size and who you are, you would go to different parts of the area, and you would have different experiences with labor. And this is going to like where we’re at with labor and jobs reports. It’s so amazing now to find people will go anywhere to find what they need a for space, but B it seems like the labor shortage is everywhere in at least the LA basin. So many people talk about Amazon being like a sponge that is just looking to soak up every last bit of warehouse labor there is. And so if you dare locate anywhere near them, good luck finding anyone to help work in your warehouse. Where are we at in the labor game these days?
Jason Miller: When you look at the number of employees at warehouses, based on the bureau labor statistics data, we finally appeared to have hit almost an inflection point where we’re starting to see a flattening of total head counts. Newer up incredibly from where we were before COVID. This is again context. I’m literally pulling it up now in the background. If you look back to 2012, we were seeing employment go up, but it wasn’t that spectacular. And then really the big gain started in 2014 when Amazon really expanded. But in 2014, we had about 730,000 folks employed at warehouses. By the time COVID hit, we were at 1.3 million. So that’s about what 500,000 positions added and right now we’re about 1.8 million. So another 500,000 positions added in just two and a half years. That frenetic pace of employment growth was inherently going to be a drain on the local labor markets.
Jason Miller: The other thing is warehousing when you look at how warehouses are distributed in the us now, they are increasingly geographically concentrated, given the greater role of warehousing and e-commerce support than let’s say 25 years ago. And so you’re looking at warehouses that are located in similar geographic areas, similar type of activity. So it’s fairly fungible skills for workers. Which can lead to poaching, same as in truck driving as an example. But then the other thing too, is you start exhausting the local labor market. If you’ve got jobs that are forcing people to walk 10 to 15 miles a day, there’s only a certain segment of the workforce that wants work like that and you’re going to start exhausting it.
Jason Miller: The other thing is the average number of people employed at a warehouse in the us has almost doubled since 2014, given that eCommerce. The surge of warehousing growth to support e-commerce. And so you have this like multifactor piece of one because warehousing is much more to support eCommerce than it used to be. The employment’s more seasonal. So we have bigger seasonal spike. We have facilities more geographically concentrated. So you’re competing with the same labor pool, even more intensely. And the average facility is larger now. So anytime a new facility comes in, there’s a bigger shock to the labor market. But I think looking at where eCommerce activity is right now. This year is shaping up to have the number of boxes delivered to folks’ houses at Christmas be essentially flat from last year, I think is almost a best case scenario. And that gets us into a very different discussion point than where we were let’s say 2019 when eCommerce grew from 2018, when it grew from 2017 and 2016. So I think we’re going to see at least for the next, probably 15, 16 months. There should be I think a little bit of a breather on the warehouse labor competition front.
Justin Smith: Yeah, it’s like a Clark Griswold Christmas vacation. We’re having Christmas this year no matter what. I love the lenses, to think about those. The seasonal spikes, the geographic concentration, the larger buildings, and urban hiking 10 to 15 miles a day. That’s a lot of distance to cover.
Jay Tanjuan: And then in terms of eCommerce, obviously you highlighted has been such a boom for, warehouse development. You touched on it, that maybe the market share from eCommerce versus the traditional brick and mortar, retail is flattening a little bit. But overall long term, wouldn’t you say eCommerce, should continue to gain more market share over brick and mortar retail, just for the sheer convenience and speed of delivery as those times get faster?
Jason Miller: That was the pattern we were certainly on before COVID. That it was just going up and up. Part of me says, yes, we will eventually start to see that curve start to go up again. Part of me does wonder though, it’s kind of like with offshoring, once we normalized trade relations with China in 2000, you had this wave of offshoring activity that took place where manufacturers said our cost structure’s too high. This type of company cannot survive in the US anymore. Be it furniture, manufacturing, be it clothing and whatnot. A lot of fabricated metals left and all of computer manufacturing, assembling laptops and desktops disappears from the US. But fast forward again to today, we’re not having an offshoring conversation because we got rid of what companies thought that they could profitably move overseas. I do wonder if we start to head an inflection point where essentially people are buying through e-commerce what they feel comfortable buying through e-commerce and at some point, there is a natural leveling off, that starts to take place.
Jason Miller: In a couple years, it’s going to be funny, but this e-commerce discussion is probably not even going to happen because the census bureau is actually going to be phasing out this distinction and there’s going to no longer be e-commerce and then brick and mortar. It’s basically going to be what is the product line that you sell? And it doesn’t matter whether it’s eCommerce versus brick and mortar because the lines are so blurry right now. So I don’t know, longer term, but it does feel like right now at least, we’re just moving sideways, and that eCommerce is a percent of retail trade sales.
Jay Tanjuan: That’s interesting because obviously, a big driver of what’s happened, in our industry, across the country really. I’m also, just curious and watching what’s happening in some of middle America. Where there’s an industrial development, that has really been spurred on by e-commerce. And if that flattens what that means for those markets. For a market like ours in Southern California, I’m, less of concern just because there is such a huge population here that will need goods and goods coming in from the ports of LA and Long Beach. I mean there’s 23 or 24 million people or so in Southern California. There’s a lot of stuff that’s already happening just in our region alone, that would at least leave me to believe industrial is for the short and long term in Southern California is going to continue to be strong.
Jason Miller: Even with the secular transition of more importing. A greater percentage imports from Asia moving through the east coast, just really because of that transition in a lot of ways towards south Asia, a little bit away from east Asia. Yeah, LA and Long Beach. they’re not going to lose their preeminence as the largest container port anytime soon. This has been a secular shift that’s been taking place since 2003. You can see almost this smooth, steady movement of more and more imports from Asia entering the US via east coast ports or Gulf coast ports than west coast ports. But that doesn’t mean we’re still not essentially at record volumes right now. And the one thing that the pandemic did is if you looked in 2019 import activity was essentially down from 2018, which is very unusual. And we completely reverse that. The question I have is especially, will we start to see again in 2023, do volumes go down a percentage point or two from 2022? Or do we go down even a couple more percentage points? And I think that’s where there’s a lot of uncertainty right now of where’s the economy look like in the middle of next year, assuming continued interest rate hikes but potentially a very tight labor market. That’s where I just think that we’re walking on uncharted territory right now.
Jay Tanjuan: And then you mentioned, the tight labor market. There’s a lot of news and, in the recent headlines about the tech industry, having layoffs. The tech industry is a more isolated kind of phenomenon than more widespread concern on labor in the future.
Jason Miller: No exactly. And I think this is where yes, tech is an important sector, but it gets in my mind a little bit too much attention when we talk about the overall, I’m going to say health of the economy. Actually pulling up right now. One group, Challenger, Gray & Christmas, they’re a large legal group. They publish a report, each month on layoff intentions. And this is essentially all the announcements compiled together. And the layoff intentions I’m reading from a post is somebody made on LinkedIn, by Theresa Shahan, down 26% in August or down 26.6%. from July. They are up 30% from last year at this time. But if we take a look right now, essentially layoff intentions right now are just not very strong. There just isn’t any evidence out there of this widespread, concern of mass layoffs. Yes. There’s been some tech announcements, but we’re still seeing that too in the bureau labor statistics data that. The rate of discharges and layoffs is down roughly 25% from what it was before COVID in 2018 and 2019. And that was a very strong economic period. And so we’re just not seeing the labor market magically softening, like I think a lot of people thought it would.
Jay Tanjuan: And why is that? You would think that with these economic headwinds. Some companies would start to a adjust and brace themselves for some tougher time ahead. We’ll see tomorrow with the jobs numbers that come out. What do you think is the reason for that?
Jason Miller: So, I think it’s a bunch of things and I don’t think we really have total visibility yet on all of those. Once COVID hit, you can see this in the data there were a lot of people that moved into essentially not engaged in the labor force. They went from either unemployed to not in the labor force. So they lose their job and they’re like, I’m not working, or they were unemployed. So they were looking for work. Didn’t have a job and they’re like, I give up. The persistence of people there were quite a few people that jumped into the end to that not in the labor force category. Difficult to understand if it’s, I can’t get the type of job I want. Or I’ve got financial incentives now from the government to not work, or I’m rethinking things in my life. It’s difficult to completely tell. We’ve had over a million deaths. We don’t really even have a sense yet of the number of people who have been essentially put on disability because of COVID. But you have to think that number has to be in the hundreds of thousands. And so part of it is we may be looking at a lower labor force participation rate due to essentially the pandemic. And we’ve had tighter immigration the last few years. And so that was always our escape valve for a lot of the jobs that are difficult to fill and we’re, we don’t have that escape valve working as well as it used to. And then there are points right now where it is. It’s like, how is the labor market so tight? What are people doing to make money? So I do wonder, no, I do wonder some of it too, is the rise of gig activity. Are we really capturing fully, the scope of gig economy work? I don’t know. I know the bureau labor statistics is trying to measure that, but it’s certainly not easy.
Justin Smith: Yeah, that’s interesting that then maybe the labor force is smaller as a result and not being able to capture it all is probably increasingly difficult. Or the BLS needs to continue to update just like they are with the e-commerce versus brick and mortar. Their methods are probably always evolving and changing how they try and capture all that data. Imagine if that’s your job, that’s a pretty difficult job to stay current on and make sure you’re doing this like an accurate portrayal of what’s actually happening in the economy.
Jason Miller: That BLS census bureau, they work a lot together on these things. There’s just ongoing issues of trying to figure out, okay, how do we better collect data? Do we move more away from surveys? Do we try to move to higher frequency data in some cases? But higher frequency data tends to be not representative. So what do we do about that? It’s a challenge, getting a broad picture of economic activity. I think we’ve really come to appreciate how important those pictures are over these last 30 months. And it’s just figuring out now, I think how we can keep refining it. And I think as business folks, how can we continue to make better and better decisions off of the data we have?
Jay Tanjuan: For us, you know non experts in this area. I’m following, the labor market. I’m following consumer spending. What else is there that we should be tracking? And once we see some trends of flattening or decreasing even, that we should be really aware about?
Jason Miller: So for me, what, some of the additional things I look at, so durable good industrial production. And the reason for focusing specifically on the durables is they tend to be much more cyclical than non-durable things like food and beverages, which are going to typically secularly trend up because we have a growing population. So durable goods productions, one, I tend to watch pretty closely. The number of single family houses under construction not started, but under construction. Anytime that series dips negative year over year, it’s a pretty good bet we’re going to have a recession. And where I’d say right now is even though housing starts have cooled, the houses under construction are still up 15 plus percent year over year. So we haven’t seen that series yet dip into negative territory. So those would be the two additional ones. And then, labor market, there’s the overall jobs numbers, the different survey tracks, the quit rate of individuals. Quitting behaviors is incredibly procyclical. And so people obviously weren’t quitting in the middle of the great recession, and they weren’t quitting in April of 2020 in the worst of the COVID shutdowns.
Jason Miller: So I would say that, following data like that can be useful. The estate phrase used to always be was you tracked railroad volumes. So like rail carloads or container loads that doesn’t really hold as much anymore though because we’re just not as dependent on rail activity as we were, let’s say back in the fifties or sixties, where using that as a metric may have been a little bit more meaningful.
Justin Smith: Nope, I would tell you that tracking 3PLs would be, the replacement for that. Or something that’s trying to find valuable measurements within the 3PL community is like an important thing.
Jason Miller: I’ve always been convinced, and I’d have to really go through and try to figure out how to compile it together because everyone reports differently. But less than truckload tonnage, is definitely something worthwhile to track because if the LTL carriers have the consumer exposure, but they’re still primarily industrial oriented when it comes to their freight max. And so to me, less than truckload is the biggest. If I had to be tracking a specific aspect of transportation, it would be what is their tonnage at? Because you could look and for example, 2019, their tonnage was down year over year. In 2022, their tonnage is up, but it’s fairly soft growth. It’s 3-5%. And so that would be where, you can start to get that sense of, okay yeah, things have slowed down but we’re not yet starting to see the, going over the curve and really heading down.
Justin Smith: You have a Bloomberg terminal there with all the stats right in front of you. You have them incredibly available to you. Or this is just the mind of Jason? It’s incredible.
Jason Miller: This is having the Fred database open in three tabs right now, up in front of it. And some of the things I’ve played with because there’s the one thing, I tell anybody listening is, anytime you’ve got an industry sector, that’s fairly concentrated. So take like less than truckload. With some creativity, you can usually compile their quarterly financials together to get some type of measure of activity. Whether it be like a retail index for Walmart and Target Costco and whatnot. Or an LTL tonnage index, you can do these things. You just have to be careful how you weight things and think about dealing with, okay, this new entity comes into existence. I do this for steel, so probably another sector to really give a close watch on as the steel industry. And you can see, even a good example, there was a slowdown in the start of this year, but actually the second quarter production for US steel, new core, steel dynamics and Cleveland cliffs, the big four. Their production was actually higher than what it was in 2018. And so that would be again, consistent with demand staying fairly robust. Steel production going down would be a huge red flag, but we are not seeing any signs of that yet. Third quarter data will be very illuminating once they report not in September, but in October.
Justin Smith: Jay would tell you, and I would tell you that lead times on steel, right? If you, you think of anything that’s in our world, that’s new construction. I don’t know what they are on roof trusses these days are like on dock levelers and on it seems like it’s also a hard industry too. There’s only so many choices and only so many places it can be satisfied. That seems like that’s an interesting challenge to figure out how to do better at least for long lead times and trying to like source materials.
Jason Miller: Yeah. I think many people who aren’t familiar with it think, oh, steel is steel. It’s like, no, no, no, no, no, no. Steel is very specialized, often tailored to specific applications. There’s one entity that produces it and they’re going to produce it when it’s most profitable for them to produce it. And if they’ve got backlogs, guess what, you’re going to get it when you’re going to get it. That’s, I think the one other sort of part of the narrative that comes together is, we’ve had so many disruptions really over the last year and a half, dealing with labor and dealing with material shortages as the amount of backlog demand that exists. It’s somewhat hard to quantify but we know in certain sectors, their backlogs are up tremendously from where they would’ve been before COVID. Part of me does wonder if just the need to fulfill that backlog demand, does it provide at least a little bit of the tailwind to potentially get us over this hump of, are we going to see consumer spending decline because of high gas prices? When we really think that infrastructure package that’s really 2023, we’re going to start feeling a lot of that. And so part of me keeps thinking, okay, if we can keep ourselves out of a recession, by the time we get into 2023, we’ve got the industrial side, that should be even stronger than it was given infrastructure and possibly with some of the uncertainties resolving themselves. Does that put us in a place to see, fairly strong industrial activity in 23 and then 24?
Justin Smith: Jason’s an optimist. This is good. Yeah, maybe it can get us to bridge the gap.
Jason Miller: We’ll find out. I try not to be over optimistic, but we’re just not seeing the signs yet. Be it the number of people filing for unemployment claims or the number of people staying on unemployment. We’re just not seeing the evidence yet that we would expect to see as we were moving into a true recession, like in 2001 or certainly 2008, 2009.
Jay Tanjuan: Coming up September, you know, the Feds meeting again. We’re expecting another interest rate height. Do you think this is having any sort of effects slowing down the economy that you’re trying to create this soft landing for potential recession here? Are they addressing the right or pulling the right levers to slow this down?
Jason Miller: I’m not a big fan of the approach, the challenge we have now is so much of the inflationary pressures is really supply side, it’s not demand side. And so part of me feels that just using interest rates is this club to try to curb demand may not be the most effective way. But the problem is the Fed can’t do anything else. The Fed can’t magically find a bunch of additional folks to work. Or can’t resolve the fact that we’ve got 30,000 containers waiting to be moved by rail rather than 9,000, sitting in LA and Long Beach. And so I think that they’re limited in that regard. And right now the concern is things like gas and certainly gas is looking better. Food’s not looking that much better and we’re starting to see the other aspects of core inflation looking worse. Especially the shelter component. So housing and whatnot. And I think that’s going to be just the big concern that the Fed has is how do we keep that piece from getting overheated?
Justin Smith: That’s interesting to think of it, supply related as opposed to demand related. That’s not where most people focus their attention on.
Jason Miller: Yeah, the Federal Reserve Bank of San Francisco has been doing some good research on that. So they get the credit for really being the ones that sort of pushed out that thesis.
Justin Smith: We appreciate you sharing your stuff. I’m sure you have had many experiences, LinkedIn publishing your opinion and trying to be unbiased and say it how you see it. A couple things you’ve learned sharing on LinkedIn, I imagine you’ve probably been embraced by a good community and a lot of people that you’ve created like new thoughts and ideas and new ways of looking at things. I know Jay, and I appreciate it. So I was just curious some of the things you’ve learned, putting your opinion out there.
Jason Miller: So I think one is, you always have to have data to back it up. And I’d say, try to do the best you can before you’re even posting on one specific thing to have multiple different data points together to corroborate it because you can have discussions. I’ve had some very public disagreements with Freightways. To me, the role of the news media isn’t to seek headlines or make the news itself it’s to report it. So I do not like, when people call things, there’s going to be a blood bath or imports are falling off of a cliff. These are very serious phrases. They move markets. And when they don’t come to pass. And there’s no effort made by an outlet to say, “okay, yeah, we made a mistake on this. We misread the tea leaves. Here’s what we’ve learned.” I’ll be the first one to admit I mischaracterized how heated the truckload spot market would be in the second half of 2020 and also after the polar vortex in the stimulus in 2021. I just did not really appreciate the consumer spending side and how that was going to drive so much disruption. And so I learned my lesson. I’ve, tried to figure out what was going on, why was my prediction that didn’t work out and you adjust, that’s the whole point. And you will have sometimes that, a lot of folks do not like engaging. They get very defensive. So I’d say, the tips one is find your audience, find what you’re interested in because it’s a process to build a network, be authentic, admit if you make mistakes or mis forecast things because that shows some humility. And yeah, it’s a process. It’s taken me a couple years now to really get to the point where I really feel, I know what I’m doing. So it’s just persistence, trial, and error.
Justin Smith: Yeah, Joe Rogan would say, don’t read the comments, but maybe in LinkedIn, that’s where half the fun dialogue is.
Jason Miller: You got to read the comments because, I hate to say it, if people aren’t commenting your content’s not going to get that much traction. That’s the brutal reality of social media.
Justin Smith: No doubt about it. We appreciate you, Jason. Thank you for joining us and spending time with us and delving into it.
Jason Miller: Thanks so much, Justin and Jay it’s been great.
Jay Tanjuan: Yeah, thank you.
