JLL’s Dr. Walter Kemmsies is an expert in global trade and economic trends. During the Jump Start 2019 supply chain conference, he is slated to talk with the audience about the evolution of NAFTA and the overall state of the international economy. To prepare for his panel, SMC³ caught up with Kemmsies to discuss globalization and the domestic logistics industry.
Thinking about 2018, how would you characterize the economy, and how have supply chain stakeholders been impacted by the economic decisions coming out of Washington?
The economy is in the middle of a historically long cycle, owing to the severity of the 2007-2009 recession. Since the recession officially ended in 2009, there has been a noticeable absence of a bounce-back period, where GDP grows at a high rate.
The economy has sustained a long period of expansion characterized by minimal investment by companies in plant, property and equipment, which is needed to increase production capacity. Companies have preferred to increase employment instead so that the unemployment rate has declined to levels not seen in several decades. The public sector has also lagged in terms of infrastructure investment. Congestion has become a widespread problem in major population centers, particularly in most seaport cities. Some railroads and many trucking companies lagged in terms of investment and employment, waiting until the need for capacity reached critical levels. Supply chain managers now have to contend with significantly higher direct freight and labor costs, as well as indirect costs resulting from a decline in reliability.
Is this economic state sustainable? Will we be talking about the economy in a vastly different way after the first half of 2019?
The current economic state is not sustainable. Cost-push inflation is increasing – wages, raw materials prices, transportation costs and industrial real estate lease rates (industrial real estate vacancy rates are below 2 percent in most major cities). Consumer spending has been relatively strong, which has allowed companies to pass on some of the cost increases. Given that unemployment of 3.7 percent is well below the long-term sustainable level of about 5 percent, it is likely that wages will start rising at a faster rate in 2019.
Unless companies start investing in physical capital to increase production capacity, they will have to raise wages to attract the labor they need in order to meet demand. However, if wages start increasing faster, then, consumer spending could strengthen and companies will raise prices to cover their rising costs.
Is there a major economic issue on the horizon that should concern members of the domestic supply chain?
U.S. exports have been declining due to trading partners retaliating. Although exports are a small part of the economy, there are ripple effects that accumulate over time. At a minimum, these ripple effects can eventually sandbag GDP growth, and in some industries that depend on exports, the impact would be magnified.
How do you view the administration’s tariff strategy?
Running a half-trillion-and-growing trade deficit will inevitably create another financial/economic crisis, and, therefore, has to be dealt with. Previous administrations have tried to resolve this, but it’s not clear that resolution would have come soon enough. Pushing fragile economies like China to the brink, however, exceeds my comfort level. A more gradual approach with intermediary quantitative goals, including penalties for not reaching them, might be more productive.
What do you see as the major pros and cons of the tariff strategy?
A major pro is that the world market for U.S. exports opens up. A major con is that if the tariff strategy is aggressive, other economies might go into recession and grow more slowly. That would negatively impact demand for U.S. exports.
What is your opinion on the necessity of NAFTA?
As we have seen, supply chains transcend political boundaries, resulting in what is referred to as globalization. Overall, this has been beneficial for the world economy because it has increased the global middle class from less than a billion people 20 years ago to almost 4 billion in the next several years. NAFTA 2.0, or USMCA, is necessary to ensure that globalization benefits all economies. An important element of USMCA is the requirement that the wage disparity between U.S. and Mexico auto workers be reduced. This was a feature of NAFTA 1.0 but not enforced.
What is the one significant economic story that’s not getting as much attention as it deserves?
China’s economy is more fragile than most analysts and commentators seem to realize. Consumption is less than 50 percent of China’s GDP; in virtually every other economy on the planet, it is in the 65-percent to 75-percent range. Therefore, China’s economic growth is overly dependent on exports, and economic policy takes on the characteristics of mercantilism. History teaches us that mercantilist policies always fail in the long run. Other U.S. trading partners also engage in such policies, although more subtly, and are also running the risk of long term problems. This is why the U.S. has pushed other economies towards more market oriented policies – the U.S. economic track record supports the merits of that effort.