Some Perspective On The Ports

If you haven’t caught the news, which would be tough given recent press exposure, it looks like the ongoing conflict between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) has finally come to an end. The last contract between the two expired in mid-2014 and the parties had been unable to reach an agreement on a new contract for months. The dispute led to delays in the movement of products in and out of west coast ports and culminated in a short lockout over Presidents’ Day weekend.

If you listen to the rhetoric about the slowdown, and the potential for a full closure of the ports, you might think that the U.S. economy has avoided a near existential crisis. Little wonder that President Obama dispatched Labor Secretary Tom Perez to mediate the dispute. And in turn, Mr. Perez was not shy about the magnitude of his intervention: “a significant potential headwind for this economic recovery has been removed,” he said.

Did the U.S. economy dodge a bullet? Candidly, no—not even close. For all the hype in the press and hyperbole happily doled out by those in the industry, the reality is quite different. Even if there had been a major strike that dragged on for a few weeks, it would have been very difficult to see the impact in any of the major economic numbers regularly used to measure the health of the broader economy. This doesn’t mean there wouldn’t have been some cost to the economy and certainly some individual businesses would be negatively affected, perhaps dramatically. But overall, the numbers just aren’t large enough to move the collective needle.

Heresy? How can I be so blasé? Four reasons. First, the movement of goods through West Coast ports relative to the overall size of the U.S. economy has been highly overstated. Second, companies mitigate. In other words, they work to find alternative solutions to supply chain issues they are facing rather than sitting around helplessly. Third, there are winners and losers, and for every loser in the disruption there is a winner somewhere else, offsetting the damage to some extent. And my final reason is the most convincing of all—history. Neither the data to date nor data surrounding past port closures suggest anything close to the potential cataclysm being described by many pundits.

The following choice quotes from published stories about the ports in recent weeks show how distorted much of the commentary and reporting has been relative to the reality:

• “The West Coast ports, responsible for 43.5 percent of U.S. trade, have been operating at reduced capacity since late October.” (www.bloomberg.com/news/articles/2015-02-21/west-coast-ports-shutdown-averted-with-five-year-labor-agreement)
• “The West Coast port slowdown could reduce fourth quarter GDP by 1%, according to Deutsche Bank’s Joe LaVorgna.” (www.businessinsider.com/west-coast-port-strike-hurts-gdp-2015-2)
• “Manufacturers in just about every industry, from electronics to home goods, are feeling the pain.” “While unions and terminal operators go back and forth on contract negotiations and possible solutions to the slowdown, manufacturers are caught in the middle losing millions of dollars, because they’re not able to meet their customers’ demand.” (www.ebnonline.com/author.asp?section_id=1056)
• “The dispute now costs the economy about $2 billion a day, estimates Kevin O’Marah, the head of research for SCM World, a group of senior supply chain executives from companies that include Barnes & Noble, Nike, Microsoft and Shell. O’Marah bases that figure on a 2002 work stoppage, which cost about $1 billion a day.” (www.ibtimes.com/west-coast-port-slowdown-labor-dispute-hits-us-economy-hard-1820740)
• “…the disruptions have already wreaked havoc on multiple industries.  Honda  recently announced  it was curtailing production at Midwest facilities because the port crisis had squeezed its supply chain.” (www.foxnews.com/opinion/2015/02/18/how-obama-is-allowing-union-to-hold-economy-hostage)

You often hear the statistic that the Ports of Los Angeles and Long Beach alone handle over 40% of U.S. trade. That is true—if you are counting shipping containers alone. A lot of “trade” isn’t moved in shipping containers. It comes and goes in tankers or trucks or airplanes, or is a service that isn’t carried at all. And the products that are moved in containers on boats actually tend to be lower value than other kinds of trade.

By value, the Ports of Los Angeles and Long Beach carry about 10% of goods in and out of the U.S., while the balance of West Coast ports carry another 5%—only 15% of total of goods trade overall. Throw in service trade and the share drops to 7% and 4%, respectively, just over one-tenth of our nation’s economic interaction with the rest of the world.

Moreover, the U.S. isn’t terribly trade dependant relative to other nations because of our location and the sheer size of our economy. Add together all U.S. imports and exports and it accounts for about 30% of GDP. For places like Korea and Germany this figure is well over 100%. What this means is that the value of goods that flow through West Coast seaports are a slightly over 3% of national GDP. Not that big of a number suddenly.

But it is also true that a small number can end up being bad for the overall economy if we are talking about critical linkages in the supply chain. What about all the disruptions referred to in the comments above and others? While anecdotes are always a bad way to measure the broader economy—in this case even the anecdotes can’t be believed. Has the slowdown cost the U.S. economy? What of the Deutsche Bank economist’s claim that 4th quarter GDP could have been negatively impacted?

While GDP growth was reduced by a full percent because of our external accounts in the last part of 2014, it was not because of shrinking trade as a result of a port slowdown. Quite the opposite. In real (price adjusted) terms both imports and exports grew in the last part of 2014 according to the official statistics from the U.S. Bureau of Economic Analysis. But imports grew a lot more than exports, hence the negative number on the economy overall. Yes, the trade deficit opened sharply. This had nothing to do with the port slowdown and everything to do with the fact that the U.S. economy is now growing faster than much of the global economy.

And there are plenty of other numbers to suggest that little has happened to the U.S. economy since the West Coast port disruptions began. Manufacturing output growth accelerated from 3.2%, year-on-year, in the 3rd quarter of 2014 to 4.5% in the 4th quarter, according to data from the Federal Reserve. And this is despite the slowdown in energy exploration. Jobs and layoffs? The last 4 months have seen the fastest pace of job growth in the U.S. since the late 1990s. Layoff notices and initial claims for unemployment have similarly dropped to their lowest levels in 10 years. Consumer spending has been on fire recently and it was a great holiday season for retailers. None of these statistics suggest that there has been any impact on the broader U.S. economy.

Was it just that the nation’s economy was at a tipping point? After all it was only in recent weeks that Honda announced it was slowing production due to lack of parts. But while much ‘news’ was made about the carmakers announcement, the numbers were actually pretty minimal. Honda announced that their production schedule was behind by about 25,000 units. To put this in perspective, last year Honda sold 1.4 million cars and light trucks in the U.S. Those 25,000 units are less than a single typical week of sales.

And those won’t be lost sales. Auto companies have plenty of slack in their production system. It makes sense in a world with periodic issues (strikes, supply chain issues, weather, etc.), and where some seasons are big selling periods (summer) and other times are quite slow (now). Honda may be a bit behind on their production schedule now, but they will have plenty of time to catch up before they lose any sales—ports or no ports.

Honda acknowledges that over 80% of the parts that go into cars assembled in the U.S. are also produced here. And as a billion-dollar auto company they have plenty of ways of getting the remaining 20% of parts into the U.S. other than through West Coast ports—including by air freight, shipping them through East Coast ports, or wheeling them through Mexico or Canada. And there is evidence that this was happening. The volume of trade through West Coast ports slowed at the end of 2014—but it increased overall in the nation. And in the worst case, Honda might even hire a company domestically to produce the additional parts. In other words, they can mitigate the potential impact of a West Coast port closure.

Critics of my point of view will counter that all of these sources of inputs are more expensive. Yes, of course. The reason the Ports of Los Angeles and Long Beach are the busiest in the nation is because they represent the cheapest option for many firms. But “cheapest” doesn’t mean “exclusive”.  And mitigating is likely to be less expensive than losing a sale to GM, Ford, Toyota or the plethora of other auto companies with lots full of cars for sale.

Which brings us to the winners and losers discussion. Many small firms are indeed being caught up in the slowdown and they will not likely have the resources Honda does to find alternative options. But for every small retailer unable to bring shirts in to sell at their store, there is another that can. There are no shortages in U.S. stores right now—just look around. For every loser there will be an offsetting winner and, and on net, there is little change.

This is true for exports as well. One of my favorite anecdotes regards a large soy exporter here in California who was unable to ship his crop to China. Putting aside the question of how we have so much excess crop to sell overseas in the middle of a major drought (see my earlier post on this silliness), the farmer did finally acknowledge that his crop did not go to waste. Only that he had to sell it at a lower price to a middleman on the East Coast.

As with most of these stories, a small scratch at the surface and the whole disaster narrative quickly falls apart. Take for example the idea that a closure of West Coast ports would cost the U.S. economy $2 to $2.5 billion per day. Impressive, considering that the ports only move $1.6 billion in goods on an average day. And studies I have conducted on past strikes (Protecting the Nation’s Seaports: Balancing Security and Cost, Haveman & Shatz, editors, Public Policy Institute of California, 2006) find little evidence of any major macroeconomic disruption. The same applies to the 12-day closure of West Coast ports that occurred in 2002—there is no data, except regarding shipping containers, that suggests any slowdown in the U.S. economy.

Why all the rhetoric? For the simple reason that mitigation efforts are costly, uncertain, and a giant headache for the managers of companies that use the ports on a regular basis. Ultimately it’s cheaper to make hyperbolic claims to the media to force public intervention and have the situation dealt with—as has happened.

Am I glad the port strife is over? Of course. I’m mainly thankful because even if there have been no major macroeconomic implications, many small firms have suffered unfairly as a result of the ILWU’s ridiculous demands on the ports and, by definition, on the rest of us. This small group of overpaid, over-coddled union members is not a bastion of the middle class, as they like to claim. Average pay on the docks runs just under $150,000 per year for relatively blue-collar jobs, according to port management, and this doesn’t include some of the best pension and health benefits around. Their efforts to preserve union jobs have reduced productivity at the ports relative to their global peers. This represents a tax, which we all pay, for the benefit of these 20,000 people.

How do they get away with it? Because they have a singularly unique position in operating these facilities on the West Coast—a position they are willing to leverage through periodic labor disruptions to pressure public officials into pushing for compromise. But therein lies the rub. We have allowed the mass of media stories about the ports’ “critical importance” to the month-to-month functioning of the U.S. economy to become conventional wisdom, and as such we have strengthened the ILWU’s position of power, ensuring they will continue pushing for even more over time. We have five years now until the next contract negotiation. I hope next time we go into those discussions with a firmer sense that it is okay to stand up to a bully.