After four years of (mostly) dismal financial performance, the last thing ocean carriers in the trans-Pacific eastbound trade need is to get kicked while they’re down. Although a positive mental attitude is certainly more desirable, the fact remains there are many reasons the eastbound trans-Pacific won’t return to sustainable profitability for several years.
Ours is a consumption society, and when people don’t have money, or aren’t confident about the prospects of earning more in the future, they forgo buying all of those must-have Asian goodies. Including health care expenditures, 70 percent of America’s GDP is comprised of consumer spending, and until consumers have more coin in their pockets, things aren’t going to get better in the eastbound trans-Pacific. For the remaining optimists in the eastbound trade, consider the following dose of reality.
The official unemployment rate in May was 8.2 percent, with an anemic 69,000 jobs added. Although there is dignity in all work, one wonders if these are the types of positions that will inspire people to run out and update their wardrobe or remodel a room. In addition, most people who have jobs haven’t seen a raise in more than three years. In fact, a lot of workers had to take wage cuts or pay more for insurance just to remain employed. Coupled with a yearly inflation rate of approximately 2 percent, this means the Average Joe is earning a lot less than before the financial crisis and recession and, as such, making fewer trips to Wal-Mart or Home Depot.
On the asset front, the Federal Reserve’s Survey of Consumer Finances recently revealed American families’ median net worth fell 39 percent between 2007 and 2010. That number, of course, is driven primarily by deflated home values, but also reflects decreasing value of other assets, including savings or 401(k)s. Much like wages, when net worth is down, consumers think twice before making any kind of purchase — in particular, the big-ticket items sailing across the eastbound trans-Pacific.
No economic obituary would be complete without mentioning the country’s 800-pound gorilla: debt. Whether one speaks of mortgages, home equity lines, credit cards or student loans, the U.S. is in total hock. Many of the lucky souls who didn’t lose their homes in the meltdown are now house poor, shelling out most of their pay to note holders. They’re also still paying down home equity lines from the halcyon days when they put a man cave in the basement or a barbeque pit in the backyard. Even if they wanted to, most of these consumers couldn’t get a loan to finance the type of spending the economy so desperately needs.
Everyone understands the dangers of credit card debt, but some people don’t realize student loans exceeded national credit card balances this year for the first time in history. The overall result is this year’s crop of graduates will be unemployed or underemployed, and strapped with loans they can’t repay. So, they’ll move back home — into the erstwhile man cave, no doubt — put off marriage, delay having kids and won’t buy a home. With housing as the bedrock of consumer spending, this longer-term demographic trend doesn’t bode well for the eastbound trans-Pacific either.
As if all that weren’t bad enough, there’s still the disequilibrium in the eastbound trans-Pacific between the demand for space and the supply of vessels. Simply stated, there are too many ships in the trade, and any uptick in imports will be dragged down by the simplest of economic axioms: When supply exceeds demand, prices go down.
To exacerbate matters, several carriers gave the shop away during spring negotiations with beneficial cargo owners and are now hard pressed to go back for any subsequent general rate increases. On a more day-to-day basis, cash-strapped carriers are ignoring market conditions and lowering rates just to have someone to send a bill to.
There’s no joy in playing the harbinger of doom, but faced with the facts, one can’t deny the financial outlook for the eastbound trans-Pacific. With no reason to believe the economy will rally any time soon, the carriers will have to find other ways to improve their fortunes. Clearly, bringing in more ships, caving in on GRIs and cannibalizing one another’s business has yet to do the trick.
Dan Gardner is president of Trade Facilitators Inc., a Los Angeles-based supply chain consulting firm. Contact him at email@example.com.