GDP Grew By 3.2%

Source: Econobrowser

BEA, All the Way! Good news, right? Well, the stock market certainly doesn't think so.

And I don't really think so either.

To the casual observer, the 3.2% quarterly increase, when compared with the last quarter-over-quarter increase of 5.6% may look like things are getting worse.

But we can just expect regression towards the mean, the economy is still growing. The 3.2% increase is on top of last quarters 5.6% increase, so we are kicking ass over last year still.

What I am concerned about is:

1. Inventory adjustment took a dive. A major dive. I was wishing for another quarter at least of unsustainable inventory adjustment. Although it still accounted for about 1/2 the GDP growth, it was still not enough. I knew it was going to end, but I didn't get my GDP fix yet. So this may mean less demand for industrial warehouse demand in the short term. We were foolish to count on it in the first place, but now that it has come and gone I am still feeling a little empty.

2. Exports slowed. What happens when the facts conspire against the narrative I was crafting? I have a speech coming up in a month on how exports were going to change the course of the nation, save the world, redevelop the supply chain. And now my job got that much harder.

3. Consumer Spending Increased: Why is this bad? You need consumer spending for imports and consumption makes up the majority of GDP anyway. Because unemployment remains high, real disposable income was unchanged after rising last quarter by 1% and where did the extra consumer spending come from? Savings declined from 3.9% last quarter to 3.1% this quarter, and decreased savings will lead to decreased investment down the road. So, who cares? Well, what did consumers buy hot-shot? Durable goods, things they put off buying when they didn't have any money. Do you know the reason why they are called durable goods? Because once you buy them, you don't need them for 5-7 years, so you can expect consumer spending to decrease in future quarters.

So, these numbers are likely to get revised, but the one takeaway is that we are probably out of the recession. The bad news is that things are not snapping right back to where they were and many of the same problems are still here, high unemployment, sluggish business investment, and a tapering off of export growth.

In many ways it feels like we are still trying to find a way out, hunting and pecking without some other bubble, be it exports, green tech etc. for everyone to rally behind.

AMB April Industrial Index: Growth

AMB collects monthly data from a geographically diverse set of customers, representing a range of business sectors, currently moving inventory through the supply chain. Monthly changes are useful for identifying business trends, turning points in customer activity and the way companies are utilizing space, as well as relative changes in markets and industries. The AMB IBI is a leading indicator of macroeconomic conditions.

"Our current findings indicate that economic conditions have improved materially since we released the index in November," said David Twist, AMB's vice president, Research. "We believe that the economy has entered a more diversified stage of recovery and we expect that U.S. GDP will surpass its previous peak from mid-2008 in the latter part of 2010."

Key Findings

-- The April AMB IBI measures 64.8 for overall business activity (over 50
signals expansion). March and April were the two strongest consecutive
months since inception of the index in 2007.
-- We expect business activity to remain elevated throughout 2010 as the
recovery advances.
-- The April AMB IBI implies that the job base should continue to expand in
the coming months.
-- The index forecasts that container volume and air cargo growth are
expected to post double-digit gains in the first half of the year and
net industrial space absorption should be relatively flat.
-- The AMB IBI indicates that industrial space utilization is on the cusp
of expansion, driven by higher production levels, improving imports into
the U.S. and rebuilding of inventories.

Zipfs Law

Land use economics is a fascinating area of study that has not garnered widespread media attention. So when it does get some press, my inner-nerd goes wild.

In this blog post from the NY Times, the author, Ed Glaeser, explains how well Zipf's Law explains the relationship between population and population rank in US cities.

In a nut-shell, this law states that the population of the largest city will correspond to its rank. in the following ways; Population = 1/x, where x is equal to the rank order of the cities.

So New York is the largest city, and Los Angeles is the second largest. So the population of Los Angeles will be around 1/2 the population of New York. Chicago is the third largest city, which will have a population roughly 1/3rd the size of New York. Dallas is the fourth largest city, which would have a population of 1/4th the size of New York, and about 1/2 the size of Los Angeles.

One offshoot of Zipf's law is Gabaix's law, which states that population growth rates are independent of the initial population.

This is a little counter-intuitive because you would assume that it would be harder for large cities to continue to grow whereas it would be quite easy for small cities to grow. Thus small cities would grow at a faster pace and eventually catch up to larger cities.

But this is not the case if population growth is independent of the initial size, as Gabaix's law states.

When you examine the history of Los Angeles an anomaly emerges. In 1880, Los Angeles was not even on the top 100 of the largest US cities. In 1890, it was #57, in 1910 it was #17, in 1940 it was #5, in 1970 it was #3, in 1990 it was #2. So in the span of 100 years, Los Angeles went from not even on the list to the second billing.

Amazing and unexpected.

Weyerhaeuser to become a REIT?

Interesting developments.

FEDERAL WAY, Wash.--(BUSINESS WIRE)--Yesterday Weyerhaeuser Company (NYSE: WY) announced it has received shareholder approval to issue a significant number of shares to enable the payout of its Earnings and Profits to shareholders in
conjunction with its conversion to a Real Estate Investment Trust (REIT).

No timetable has been set for the conversion and Earnings and Profit payout, however, the Board of Directors has previously stated that the earliest and most likely timing would be in 2010.

The Board of Directors also announced, when the Earnings and Profit payout occurs it intends to distribute the maximum amount of stock allowable under the Internal Revenue Code. For 2010, the IRS allows a 90% stock distribution of Earnings and Profits.

“The REIT structure best supports our strategic direction,” said Dan Fulton, President and CEO. “We appreciate the approval by shareholders which will allow us to take the necessary steps to complete the conversion process.”

Weyerhaeuser Company, one of the world’s largest forest products companies, was incorporated in 1900. In 2009, sales were $5.5 billion. It has offices or operations in 10 countries, with customers worldwide. Weyerhaeuser is principally engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate construction and development. Additional information about Weyerhaeuser’s businesses, products and practices is available at http://www.weyerhaeuser.com.

Looks like they might do less cutting of trees and more building of buildings. Some of the largest landowners here in Southern California were gas companies, who owned the land and didn't know what to do with it. They eventually developed the land they acquired long ago and have been very good landlords.

I suppose forest products would be no different.

Phelan to Join DCT

Beer & Derivatives, my lucky day!

Article from Businessweek on how derivatives were actually meant to work.

MillerCoors and other brewers also buy massive quantities of wheat, rice, malt, sugar, and corn. The prices of all those commodities can swing wildly, so the financial products known as derivatives—hedges on whether prices will rise or fall—help the brewer lock in a price range that smooths profits. Now the Obama Administration is looking to prevent another financial crisis by regulating the derivatives MillerCoors uses.

Fortune 500 Just Released!

The Fortune 500 for 2010 has just been released. Wal-Mart is the largest company in the US in terms of revenue, surpassing Exxon Mobil by quite a large margin.

Why are these 500 companies such a big deal you may ask? Well, in 1955, the 500 largest companies in America represented around 39% of all activity in the country, or around 2/5ths of GDP. In 2010, the fortune 500 companies represent around 75%, or 3/4ths of GDP. So, in theory, 75 cents out of every American dollar is a result of these 500 companies.

The companies themselves are a snapshot of the economy of the U.S. and provide insight into the geographic diversity of the country. The top 5 states in terms of revenue are: New York, Texas, California, Illinois & Arkansas (due to Wal-Mart). Companies in these top 5 states account for around 50% of all the revenue in the Fortune 500 firms.

If we do the same analysis for industries, a similar snapshot of the economy emerges. The top 5 industries are: Petroleum Refining, Commercial Banks, General Merchandisers, Insurance: Property & Casualty, and Specialty Retailers. These top 5 industries make up around a third of all economic activity generated by all Fortune 500 Companies.

Pulse of The Port 2010 Forecast

The Port of Long Beach does an annual forecast. You can view the entire piece here.

Some takeaways that I thought interesting.

Don Magaddino does a magnificent job each year and this year was no exception. He teaches the Masters of Global Logistics at Long Beach.

The US in 2009 lost around 7 million total jobs. California lost 460,000 and around 50,000 of those jobs were logistics jobs.

Inventory replenishment was responsible for the current growth we are seeing in GDP. He believes the recession is over with growth for the US in 2011. Modest economic growth of around 2-3%. He sees employment lagging employment growth and to a lessor extent.

Consumption is down but he believes 2012+ will take us to the pre-recession highs. There are a number of factors weighing on consumption, being unemployment, decline in income growth, loss of housing and equity wealth, increased risk perception and a tight credit market.

In 2009, there was a spike in durable goods consumption, notably the cash-for-clunkers program, which basically displaced consumption. He sees more being spent on non-durable goods in the future as consumers who have postponed their retail purchases during the worst of the recession begin to make these purchases again. Services should also have a strong showing.

As far as port activity, he sees loaded outbound increasing 7.7% in 2010, to around the same level as in 2007. For loaded inbound, he sees a 8,9% increase, around the same level as in 2008.

The next speaker was Jeff Sieward, from Home Depot. Last year the speaker was from Lowe's. Both companies are major importers of goods, with Home Depot being the 3rd largest importer in the U.S. with 10% of their stores here in California. They have a distribution center in Mira Loma and are currently building a 667.000 SF rapid deployment center in Ontario. They have some big things in the work, the fact that they are building a center rather than buying a cheaper, already existing one signals to me at least that they run a very tight logistics ship and Jeff seemed like a very sharp guy.

For 2010, he sees sales increasing 2.5% over 2009. (This is a low-ball estimate and should be pretty easy to beat.)

He works a lot with shippers, and the extra ocean capacity has shippers reducing supply in order to drive up rates to profitable levels. Home Depot is diverting more of its NEW cargo to alternate ports while keeping its EXISTING levels of So. Cal cargo the same. So growth from the 3rd largest importer to So. Cal ports is capped. The reason?

Port diversification, more discretionary cargo going directly to those markets, being diverted to other ports to lower the overall price. He summed up the competition the So. Cal ports are facing, with East Coast ports offering huge incentives for him to move there. These other ports were calling themselves the 7-up of ports, the Un-California. (Because 7-up is the un-cola, took me awhile to get the humor).

He hinted at why the new center in Ontario will be special. The rapid-deployment center will have different channels of distribution depending on what is ordered and used more and can be delivered at a quicker pace, thus reducing shipping cost by moving all high velocity goods together while slower moving supplies will travel together.

The next speaker was perhaps the most honest out of all of them. It was Wolfgang Freese of Hapag-Lloyd. This is a shipper that makes 140 ports of call at Long Beach (he didn't want to say how many times he goes next door to Los Angeles).

Shippers were among the worst hit in the recession and this guy did not pull any punches. He in many ways is a customer of the Ports of Los Angeles and Long Beach, and he has not been a very happy customer.

Basically, in 2008 he delivered 8% less than in 2007 and in 2009 he delivered 19% less than in 2007. But, wait, there is more.

In 2009, his West-Coast trips were down 25% over 2007, while his East-Coast trips were down 11% relative to 2007. He is favoring East-Coast ports because they are cheaper and the infrastructure on those ports is getting better. He complained about the inconsistent fees and an uncertain cost horizon at the West Coast Ports and stressed that doing business in Canada & Mexico is far cheaper than the Southern California ports.

He said that now is the worst business climate for the shipping industry, ever. Carriers lost 22 billion in 2009, profitability is down and intermodal traffic is down 20%.

He mentioned a statistic that was really chilling: Retail sales were up only 1% in 2010, yet port traffic was up 15% in an inventory restocking scheme that is unsustainable.

His company is working on faster ships, (meaning smaller ships) that will be more flexible. Part of the problem was that large ships were built that could only dock at a very limited number of spaces (LA & LB being one of them). In the future, he sees the supply chain as more flexible, with more ships going to more places rather than larger & fewer ships going to major port hubs.

Translation: LA & LB will lose market share and can really only count on captive cargo, the discretionary cargo will find the lowest cost once these barriers are removed.

Peter Payton for the ILWU spoke, mainly talking about how in the economic crisis, everyone fell back to protect their own individual interests at the expense of the whole.

Next was Frank Capo, a terminal operator. He was lamenting the fact that in 2006 everyone thought that the ports would be at max capacity and would need to build a port the size of Oakland every year to handle the flood of cargo.

The next speaker was Fred Malesa from BNSF. His company manages 300 trains a week to the ports. BNSF is spending 30 billion in the next 12 years, a lot of it in Memphis for an intermodal hub. He said that gains were being made in grain, steel and chemicals, and expected intermodal to be up in 2010 over 2009.

The last speaker was Matt Schrap from the California Trucking Association. He sees a 70% increase in tonnage in 2010 over 2009, a huge increase. This will be done with fewer employees however, since most companies are still laying off drivers.

California has the greenest fleet in the world and trucking creates jobs. 1 truck creates 80 support jobs. He sees an increase in trains due to pricing pressures, with each train being able to handle 280 - 330 trucks. The on-dock railroad at the port handles 270,000 containers a year, which means reducing a significant amount of truck trips.

He said truckers will still haul a majority of goods, since goods will still have to be transloaded by truck, the last 30 miles of any good will almost always involve a truck. Just-in-time inventory strategies require the flexibility only a truck. He is worried about gas prices and fuel taxes. Generally, it is politically easier to tax diesel than gasoline, since voters are less sensitive to passed on fuel costs than direct gas charges. Cap & Trade is also a tax on truckers and is against the current cap & trade policy of charging truckers without giving them adequate permits.
He said that consistent regulation is required, the Green Ports trucking program was a nuisance for the people he represents but it was implemented in a consistent manner so the negative impact is reduced.

So that my friends is the 2010 Pulse of the Ports Peak Forecast in a nutshell.

Special tip of the hat to the Port of Long Beach for putting this event on year after year. It has sparked my continued interest in the supply chain and is a great information resource.

Wag of the finger goes to the Port of Los Angeles for not putting something of this magnitude on, or if they do not advertising it to the extent that Long Beach does.