December 4, 2002


How much distortion did the port lockout and subsequent work slowdown on the West coast cause in this economy?  This is not just the title of an academic research paper that no one but a tenure committee will ever read.  Its answer might reveal what forecasters can expect in the next few months. 

Although the evidence remains anecdotal, we know that port congestion caused serious delays at the West coast ports and diversion of traffic to gulf and east coast landings.  With so many containers waiting to be off-loaded, shipping units were not returned to Asia, and became scare there. 

Costs increased and recovery was delayed.  Toys, clothing, and other textiles appear to be the largest distortions, though autos and parts clearly suffered some blows of their own. 

Most of the sharp October dip in industrial production reflected slowing in areas that saw sharp gains in retail inventories during September.  In other words, consumer hesitancy led to inventory buildup that was almost immediately repaired by production declines.  Fortunately, the problem did not intensify in October, partially because Asian inventories were not yet delivered. 

Some goods were not delivered in time to be included in Christmas sales catalogs.  The clothing delays kept fall prices higher than they otherwise would have been.  While shippers and distributors probably suffered, the better margins by retailers probably offset the reduced volume of sales. 

Frankly, it is too early to know whether reduced choice because of shipment delays will mean reduced spending by consumers.  They might merely move to other goods to complete their shopping list.  However, past experience suggests that some lost Christmas sales probably will occur from these constrained choices. 

Despite presidential intervention, the congestion persisted into November.  Then, an agreement on pensions (and the union's resistance to new technologies) led to a settlement and the beginning of improved shipment.  Congestion probably will slowly diminish during the holidays and then disappear early in the winter months. 

There is little doubt in my mind that the port problems caused the dip in the coincident indicators that the Conference Board almost certainly will discover upon re-estimating its October information.  GDP almost certainly fell that month. 

Did that port problem cause the summer stock market rally to reverse and fall into new lows by early October?  Probably.  Did that aborted stock market recovery sap confidence from consumers and corporate planners?  Certainly.  Will we suffer slower fourth quarter GDP because of the port problem?  Absolutely.

Now that we have settled those issues, will the results of Autumn's weakness in the economy lead to weakness next year.  While the answer could be yes (that 118 day steel strike in 1959 certainly did not help the following year's economy), I think the answer this time is no.

As soon as the congestion became acute, second orders from retailers dried up.  While this will hurt production in China, fall shipping in the U.S., and some Christmas sales, it actually means that inventories remain well managed.  Some discounting will be aggressive after Christmas as some goods finally arrive.  But the ongoing problems will not be great. 

Those corporate planners probably have ended their planning sessions with another year of low capital spending in their anticipations.  However, new technologies are rapidly lowering costs for those venturesome enough to seek new methods.  Unfortunately, some of the new processes will be in Asia, where growth makes it easier to adapt the best technologies. But capital is not limitless in Asia. 

By realizing that the conservative plans that were chosen were the result of temporary sluggishness, corporations can begin augmenting their spending plans.  American industry still can compete using technology, if they have the will to do so. 

The good news is that the investor appears to now understand that temporary conditions caused that summer stock market swoon, not the development of new long term economic problems.  The stock indices have restored the levels that prevailed before the ports slowdown undermined economic activity. 

Now if we can only get corporate planners to reopen their plans and reject that conservative spending choice that most of them made.  Then we could see a strong gain in stock values, improved confidence, and a strengthening economy as delivery and port activity return to normal early in the new year. 



mbar.jpg (9380 bytes)