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Consumer demand for goods shows signs of slowing: Economist

Flexport Chief Economist Phil Levy joins Yahoo Finance Live to discuss inflation, labor shortages, supply chain constraints, consumer demand, and the outlook for cargo shipments.

Video Transcript

DAVE BRIGGS: The ongoing supply chain crisis is fueling inflation to 40-year highs. What does this mean for the Fed and the economy as a whole? Phil Levy is the chief economist at Flexport and joins us now. Phil, good to see you. You retweeted Friday morning that this is a whatever it takes moment for the Fed. The Dow is down more than 1,000 points since then. The S&P and the NASDAQ have followed suit. What would you like to see from the Fed on Wednesday?

PHIL LEVY: I think the Fed is in a difficult position now. It's like the old joke, you know, how do you get there? And so, I wouldn't start from here. So I guess I would like to see a 75 basis point hike. That's not an official Flexport position. It's my own. I think the Fed is behind in terms of addressing inflation. What we see right now is that the Fed funds rate is dramatically below even the most conservative measure of inflation. And that means that we're still stimulating.

RACHELLE AKUFFO: And so at this point, I want to check in with your flex point-- Flexport's post-COVID indicator, one of the indicators that you have looking at what we're seeing post the peak of COVID there. And you're looking at the measuring the balance between the US consumer spending on goods versus services. What are you seeing there?

PHIL LEVY: Yeah, I'm glad you raised that because to me, that's right at the heart of the story of what's happened and how we ended up with this, which is that you see the scale right there. What that scale shows is zero is what we had as the norm, the balance of goods and services before the pandemic. People tilted very heavily towards consuming goods. That's what put strains on supply chains, and it helped drive up the prices.

What we have been seeing most recently is some hints that this may moderate. There's a difference between what we see for durables, which seem like the demand is lasting, and nondurables, which seem to be falling off a little bit more. But we have not yet seen a return to what had been very, very much the steady norm before the pandemic.

SEANA SMITH: Phil, what's it going to take to get back to that study norm until we see that level begin to normalize?

PHIL LEVY: It's a great question, and it's very hard to know. What we've seen, this was really the distinguishing change in economic behavior during the pandemic. Clearly, it has a lot to do with how people are feeling about the health situation. To the extent that that clears up, that should help. I should also note, though, this has to do with the balance between goods and services.

If people get scared, maybe because they watch your show and they see what happened to their 401(k) balance, or because their incomes aren't keeping up with inflation, you could get an overall cut in consumption, which would also ease pressures on the supply chain system, but make life unpleasant for people.

DAVE BRIGGS: I want to ask you about something President Biden said Friday when he was at the Port of Los Angeles. He showed that old Joe Biden fighting spirit we hadn't seen in quite a while when speaking about the supply chain coming full circle and whether or not there's a fix for that. Listen to what he said.

JOE BIDEN: Every once in a while, something you learn makes you viscerally angry. Like, if you had the person in front of you, you'd want to pop him. Now I really mean it. These companies have raised their prices by as much as 1,000%.

DAVE BRIGGS: The president talking about firms that are abroad. Is he misinformed, or are our supply chains broken by COVID? Or is there a legislative fix?

PHIL LEVY: I don't know that there's a legislative fix. You've certainly had firms with a lot of trouble supplying things. And I think what you've often seen is, when goods are very scarce, the price gets bid up, that you'll see, whether it's at sort of the wholesale level or the retail level, when someone's running out, rather than sort of maintaining prices at a low level and watch the shelves empty, you say, clearly, prices should go up.

I don't think there's a legislative fix for scarcity that way. I do think we can make supply chains work better. That's something that Flexport is deeply committed to. But I don't think that's at the core of the problem here. I think it really is the fact that we saw an incredible surge in demand.

If I could toss out one number, that would be, you look at durable goods. These are things that last a few years. So think about sofas or home exercise bikes. Between the eve of the pandemic and the spring of 2021, we saw consumption in the US of durable goods go up by about 35%. We just consumed a lot more. That strained the system, and there were shortages.

SEANA SMITH: Phil, the shipping times, what exactly do they look like now? And just in terms of how elevated they were compared to those pre-pandemic levels, we talk about the fact that we've seen some improvement in the supply chain. There's some improvement at the ports. But from my understanding, we're still a far ways off from where we were back in at the start of 2020. Is that right?

PHIL LEVY: You're absolutely right, that we put out a measure of this, our Ocean Timeliness Indicator, which you can find on flexport.com/research. We update it every week. You've seen improvement in the last few months. But we're getting back to about where we were in roughly October of last year.

To be specific about this, getting a good from leaving the factory in Asia to, say, getting taken out from a port in the US, pre-pandemic, ah, 45, 55 days. Now it's much closer to 100 days. It was worse a little while ago, so we've seen improvement. But we're nowhere back to-- there you go. We're not back to where we were.

RACHELLE AKUFFO: And Phil, I want to ask you about some of the workarounds that people put in place to sort of manage supply chains. How many of those are going to end up being permanent, as they say, look, perhaps we do need to diversify, diversify some of our routes or perhaps some of the people that we're getting our production from?

PHIL LEVY: Well, you're very right to point to the idea that supply chains are not something that can be easily switched back and forth overnight. I think this is one reason why you've seen some hesitation for someone to, say, do the kind of near shoring that President Biden has talked about because you don't just flip from, say, a Southeast Asian supplier to a Latin American supplier and then back again. So, not knowing how long this was all going to last, looking at sometimes serious price differences, there's been some hesitation there, but it's also happened. And I think where it's happened, you would expect that to last.