Using Economic Data and Trends to Predict Trade Swings
7 Dec, 2016By: Meredith Martino
FEW PEOPLE SAW THE 2008 GLOBAL FINANCIAL CRISIS COMING until it was too late. The indicators weren’t pointing toward doom and gloom. Yet, there were those who managed to look at the information underpinning the data and accurately predict what would happen to the U.S. economy.
How’d They Do It?
Making sense of financial data and economic trends is a priority for any person or organization with long-term financial goals, be it a recent college graduate planning for a comfortable retirement or a fledging Internet business looking forward to its IPO. While the past few years have given rise to a cautious optimism that the Great Recession has finally loosened its grip on recovery efforts, recent events have shown that the world may be on the brink of something very worrisome.
For the world’s seaports, financial and trade executives are trying to see what’s coming for their organizations by sorting out what’s meaningful to their futures and making wise choices for the good of the communities and stakeholders they serve. While no port is looking for “The Big Short” type of yield on its decisions to invest in assets and infrastructure, all ports are trying to figure out which data to pay attention to and what should be guiding their decision-making.
Matt Plezia, the Port of Long Beach’s director of master planning, believes that for ports to be successful in today’s globalized economy, the cargoes they handle need to be natural to the areas the ports serve.
The Port of Long Beach, in partnership with the Port of Los Angeles, just completed a new long-term cargo forecast for the two San Pedro Bay ports. The forecast is a demand-type prediction that is based on macroeconomic trends and also looks at the two ports’ competitive position as a gateway.
“We think more about the two ports’ role in the U.S. economy,” said Plezia. “We respect our role in the global economy and we respect our international partners, but our role in the global economy isn’t as prominent [as our role in the local economy] in this forecast.”
He emphasized that the two ports historically have focused on accommodating growth, which is driven by the U.S. demand for imports.
The ports’ long-term efforts “skip some of the economic indicators” that can be more near-term, Plezia explained, and are driven “a lot by demographics and how demographics might drive U.S. [gross domestic product] and what that means for the demand for imports.”
He said, “We try to predict domestically the demand for goods and where those things will come from.”
While the two Southern California seaports are aware that there may be some shifting of sourcing patterns, specifically to Southeast Asia or near-sourcing to Mexico or within the U.S., “the long-term expectation is that China and northeast Asia will remain more important” as the origin of import cargo.
As the Managing Director, Economist & Chief Strategist for the Ports Airports & Global Infrastructure Group of Baltimore-based JLL, Dr. Walter Kemmsies’ work is focused on freight movement infrastructure investment oriented toward international trade.
Amidst a sea of data about energy prices, emerging countries’ economies and commodity prices, Kemmsies said that ports’ planning for the future should be focus most on what consumers — especially regional consumers and industries — are doing.
Twenty years ago, emerging markets represented only about 12 percent of the world’s top 20 economies. In 2005, they were 25 percent. Now, approximately 34 percent of the world’s top 20 economies are from emerging markets. So the influence of larger, established markets like the United States has been diminished while the sway of markets such as China — still considered an emerging market — has grown.
“China is trying to slow growth, but it’s still growing, not contracting,” he said. “The Chinese government has been too aggressive in constraining growth and needs to pay attention to Chinese consumer sentiment.”
For U.S. ports, Kemmsies pointed to domestic employment numbers, which have been steadily rising in recent months. “Chinese incomes are still very low compared to U.S. wages. A two percent increase in employment in the United States is more significant than a two percent decline in China’s employment,” he said.
He also pointed out that the U.S. housing market has been steadily recovering.
Similarly, Plezia recommended U.S. ports not over-react to the ups and downs of the Chinese economy.
“For us, China is a producer of products coming to the U.S.,” Plezia explained. “Any contraction of the Chinese economy would potentially impact our export trade with them but not necessarily our appetite for imports,” which are not only store-bound finished consumer products but also raw materials and components used in U.S. manufacturing.
Beyond China, Kemmsies also urged ports to pay attention to what is happening in Russia and Saudi Arabia. With Russia, the concerns are less economic and more about the potential for war with other nations, which has the potential to disrupt global markets in a significant way.
Saudi Arabia, as the leader of OPEC, is still pushing OPEC into fighting to retain world oil share.
“They’re fighting technology,” Kemmsies remarked. “The whole mentality isn’t working.”
He noted that U.S. natural gas producers have improved technology and gotten a much better yield as a results. As OPEC lost share, it increased production to increase its share and attempt to bankrupt U.S. producers and scare them out of the global energy market.
“Oil prices right now are below cost,” Kemmsies pointed out. “The U.S. yield [on natural gas] is getting better all the time.”
And these energy prices are playing a huge role in other commodities. Both oil and natural gas are the feedstock for plastic pellets that are becoming No. 1 U.S. export.
“Steel and plastic are the two most important commodities in the modern economy,” Kemmsies said.
The U.S. market for energy is changing rapidly with the growth of the natural gas industry and also with the recent lifting of the U.S. oil export ban. In January, ConocoPhillips shipped crude through the Port of Corpus Christi, Texas, to Germany. This was the first export of U.S. crude in more than 40 years.
“U.S. refineries are complex and can handle any kind of oil,” Kemmsies explained. “But other parts of the world have simple refineries, so the U.S. will begin exporting light, sweet oil and importing heavy oil.”
Accommodating this trend will be one element of port industry growth in coming years. Both Plezia and Kemmsies said ports need to be focused on capacity.
Plezia’s Port of Long Beach team is taking the port’s long-term cargo forecast and using it in a long-term land-use study.
“Terminal operators and carriers are thinking about this year and how to manage the peak,” he said. “We’re thinking long-term. The land-use study is an attempt to pull together our tools [including the cargo forecast] in a more holistic way.”
Kemmsies urged ports to maximize their efficiency and look for ways to expand their footprint. “Imports are doing better now but exports will improve,” he said. “In the near term, ports should look to optimize dwell time. In the medium term, they need to address density. In the long term, they should focus on acreage,” he suggested.