INSIGHTS: TRANSPORTATION WOES TO UNDERCUT GROWTH?
GUEST COLUMNIST: Joe Pickard, Chief Economist and Director of Commodities, Institute of Scrap Recycling Industries, Inc.
As just reported by the Bureau of Economic Analysis, U.S. real GDP grew 6.4 percent at a seasonally adjusted annual rate in the first quarter of 2021, up from 4.3% growth in the 4th quarter of 2020 and largely in line with analyst expectations. As it turns out, the healthy first quarter growth rate exactly matches the International Monetary Fund’s forecast for U.S. output to expand 6.4% for all of 2021. Underpinning the IMF’s projections for faster U.S. and global economic growth are expectations for a sharp rebound in world trade volumes. Following an 8.5% contraction last year, the Fund is forecasting global trade will surge 8.4% higher in 2021. But delve a little deeper into the BEA numbers for the U.S. economy and you’ll find U.S. exports actually contracted 1.1% in the first quarter following a 22.3% surge in the fourth quarter of last year. Overall, net U.S. exports represented a negative 0.87% drag on first quarter growth.
While net negative U.S. exports is not that rare of an occurrence, the difficulty U.S. exporters are having securing containers, trucks, chassis, and vessel space is a major concern. Combined with challenging domestic transportation markets, shipping woes are posing a growing risk to growth going forward. For the scrap recycling industry that ISRI represents, transportation bottlenecks have been particularly painful. Thanks to the 2021 Economic Impact Analysis conducted by Dunham & Associates, we know that the scrap recycling industry directly and indirectly supports more than 500,000 jobs, has a positive economic impact of more than $106 billion, and is a major supplier or raw materials to manufacturers in the U.S. and across the globe. According to ISRI estimates based on PIERS trade data, the U.S. exports more than 1.3 million TEUs of all scrap commodities every year. But the disparity in eastbound container rates coming from Asia to the U.S. — which in some cases have more than tripled or quadrupled in the last year, and the relatively low rates for westbound traffic has incentivized the shipping lines to get containers back to Asia as soon as possible, in some cases blanking the sailings of scrap exports.
The skyrocketing container rates from Asia are only one symptom of a transportation system in disarray. As recently reported by the Wall Street Journal, the shipping traffic jam is “part of a broader gridlock in supply chains around the world amid disruptions from the coronavirus pandemic.” For example, the Baltic Dry Index, an indicator of bulk freight rates, has recently hit 10-year highs. Exorbitant demurrage costs and related fees have also been plaguing U.S. railroad traffic. In addition, truck driver shortages were problematic well before the COVID pandemic and are not likely to be resolved anytime soon. According to projections from the American Trucking Association, the shortfall in truck drivers in the United States is expected to grow from 60,800 in 2018 to 105,000 in 2023 and 160,000 by 2028.
The rising transportation costs and bottlenecks, including the recent highly-publicized shutdown of the Suez Canal, are having significant implications for supply chains and industrial production, as evidenced by the global shortage of semiconductors that is now weighing on U.S. auto production and other sectors. Thanks to the economic impact information provided by Dunham & Associates, ISRI and other industry associations are making the case with the Federal Maritime Commission, Surface Transportation Board, and other government bodies in order to emphasize how detrimental these shipping market developments are for U.S. exports and growth. While the overall economic outlook remains positive, there’s little doubt that transportation problems, along challenging labor markets, potentially rising taxes, and higher regulatory costs are posing risks for U.S. businesses that that are not likely to go away anytime soon.
ON THE ECONOMY: THE SONG OF THE COUNT
John Dunham, Managing Partner, John Dunham & Associates
You know that I am called the Count, because I really love to count. I could sit and count all day, sometimes I get carried away. I count slowly, slowly, slowly getting faster. Once I’ve started counting it’s really hard to stop. Faster, faster. It is so exciting! I could count forever, count until I drop. 1! 2! 3! 4! 1-2-3-4, 1-2-3-4, 1-2. I love counting whatever the amount – haha! So begins the Song of the Count, the Sesame Street character Count von Count’s signature song. It was written by Jeff Moss and Emily Perl Kingsley in 1973. The Muppet, Count von Count, was created by Norman Stiles, and voice by Jerry Nelson from its first appearance in 1972 until 2012, and by Matt Vogel thereafter.
Counting is important, and no more so than when the US Department of Commerce, Bureau of the Census, releases its population estimates every 10 years. There are 435 seats in the US House of Representatives, and every 10 years, these seats are allocated across states based on their percentage of the overall population. This year (based on the 2020 Census) a total of seven seats will shift, with Texas gaining two seats, and Colorado, Florida, Montana, North Carolina and Oregon each gaining one. The states of California, Illinois, Michigan, New York, Ohio, Pennsylvania and West Virginia each lost one seat.
Not only will seats shift across states, but in every state, the geographical boundaries of each and every congressional district, as well as many state and local legislative districts, will be redrawn in a process known as redistricting. This process will allocate a similar number of people to each legislative district based on the geographical shape. Our very first edition of the Monthly Manifesto examined this, along with a process known as gerrymandering named after former Vice President Elbridge Gerry. When Gerry, was Governor of Massachusetts in 1812, he signed into law a bill that created a partisan district in the Boston area similarly shaped to that of a salamander.
The process of redistricting is not simple, and even though it is supposed to be implemented by the 2022 elections, this does not always happen. In fact, the 2010 districts established in North Carolina were struck down by a court ruling in 2019.
What makes redistricting so complicated is that it is a political rather than a demographic process. Constitutionally, it is the State Legislatures that control redistricting (subject to certain limitations) and unless they are somehow limited by state law, politicians tend to draw these districts in ways that benefit their own party (and themselves). This leads to court challenges that can take years to settle. In fact, the Governor of New York is already considering a court challenge to the apportionment process that led to the Empire State losing a seat in Congress.
In order to make the process less political, eight states have appointed redistricting commissions to determine Federal district boundaries, and fourteen have appointed commissions to determine State district boundaries. That leaves a total of 36 states where districts are completely politically determined. Of the 42 states without a Federal redistricting commission, 21 are controlled by Republicans, 7 by Democrats, and 8 are split. There are 6 states that do not need to redistrict. While this suggests that Republicans have a tremendous advantage in 2022, it should be remembered that Democrats have single party control over states that control 138 House seats.
Now that Census has determined the number of House seats for each state, barring any lawsuits, the individual state redistricting commissions and legislatures will begin to redraw the maps. Were this done scientifically, using software to allocate voters across districts based on the principles of: Compactness, contiguity, and where required by law, racial fairness, redistricting could be accomplished in a couple of hours. However, in America this is not how things work.
The states each have self-imposed deadlines on when they need to file new district boundaries. These range from November 29, 2021 (Illinois) to June 29, 2022 (Rhode Island) for Congressional boundaries, and November 29, 2021 (Illinois) to August 10, 2023 (Louisiana) for state district boundaries. Once these plans are submitted, they can be challenged in court.
In 2010, according to Ballotpedia, as of the middle of 2015, redistricting lawsuits were filed in 37 states, and courts needed to intervene in 25 percent of all of the boundary maps submitted. The reasons for the lawsuits ranged from compliance with redistricting guidelines in state constitutions, equal protection (one person, one vote), and the Voting Rights Act. In some cases, legal action was triggered by the failure of normal redistricting processes and the courts had to step in to draw boundaries. Because of these legal actions, redistricting was not completed in Florida until 2015, and in Pennsylvania until 2018. As previously mentioned, a North Carolina state court struck down the state’s legislative districts in 2019.
Once state legislatures and courts finally agree on district boundaries, they are mapped, and the maps are submitted to the Census Bureau. Commercial mapping software (like the Maptitude software that JDA uses) do not have access to the boundaries until Census releases them in its Topologically Integrated Geographic Encoding and Referencing (TIGER) system.
Of course, the district boundaries do not become effective until the legislatures elected in 2022 are seated, so not until January of 2023 in the case of Congress, and until early 2022 or 2023 in the case of state legislatures.
So, just like Count von Count, it seems as if once state legislatures have started counting it’s really hard to stop. Faster, faster. It is so exciting! They could sit and count all day, and sometimes get carried away.
On a practical note, John Dunham & Associates updates the legislative district boundaries for its models following the 2022 elections. Models completed during 2022 are redistricted at that time and future models are made using the new districts. When lawsuits require changes to the legislative districts (as happened in Florida and Pennsylvania during the last cycle) JDA updates the models with the new boundary files as soon as they are made available.