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GT Podcast – Community Connection Series – Episode 11 – Junction City: ELITE City of Kansas Taking Growth to a New Level

podcast cover art for GT Podcast - Junction City, KS
Archives, GT Podcasts

GT Podcast – Community Connection Series – Episode 11 – Junction City: ELITE City of Kansas Taking Growth to a New Level

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In this episode of Community Connection, we will speak with Economic Development Director,  Mickey Fornaro-Dean, to learn about what makes Junction City, Kansas such a special and unique opportunity for business. What are the workforce, transportation, and land opportunities that are being capitalized on? And what the heck was Custer doing in this opportunity-rich community?

For more information on Junction City-Geary County Economic Development Commission,  visit https://www.jcgced.com/

Check out more of our GT Podcast – Community Connection Series here!

economy
Archives, Global Logistics, Global Trade Daily, Trucking

The role of the moving and storage industry in the US economy

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We often fail to see the big picture when considering the moving and storage industry. Sure, we all know that tens of thousands of Americans move every year. But, what is the role of the moving and storage industry in the US economy, and can one function without the other. This article will tackle this rather complex question and hopefully provide a deeper understanding of the moving and storage industry.


 

US economy and the moving and storage industry

As you’ll soon see, the connection between the US economy and the moving and storage industry is a rather complex one. There are various ways in which one impacts the other, and often those ways interact. So, while we will try to give you a decent overview, we can’t cover the entirety of this subject. If this interests you, we strongly recommend that you keep reading our blog and find out more about the connection between the US economy and moving and storage.

The tight correlation between the US economy and the moving and storage industry

It doesn’t take much research to learn that the US economy and the moving and storage industry are closely related. Almost every economy study available will show that as the economy increases or decreases, so does the moving and storage. This is best seen in times of recession, where a sharp drop in the economy perfectly correlates with a decline in moving and storage. The only notable difference is that moving and storage usually lag behind the economy. While the economy can recover relatively quickly, it takes moving and storage a bit more time to get things underway.

Understanding the moving and storage industry

When it comes to pure shipping, there are three major companies in the US – FedEx, Amazon, and the United Parcel Service. But, we have a different picture when it comes to moving and storage. The moving industry is mainly comprised of small to medium companies. These companies are spread out through the US, where each service has its area. As a moving company is dependent on the local market, it can be pretty difficult for companies to branch out. Some do, but usually at the expense of service quality.

This is important to keep in mind as there is no go-to moving and storage company, even for commercial purposes. If companies need to relocate their offices, they need to rely on local moving companies to see them through. Seeing that many companies need to relocate their offices, it doesn’t take much to realize that the moving and storage industry is integral to the US economy.

Furthermore, you have people moving for work all the time in the US. Getting the exact numbers can be difficult. But, it is safe to assume that at least a third of relocations in the US is due to work. Add to this the mass exodus from larger cities brought by remote work, and you’ll soon see how vital moving and storage are.

Do other countries depend on US moving and shipping?

As previously stated, tackling moving and storage is usually local work. Therefore, if people from other countries want to relocate to the US or transfer items, they cannot help but rely on the local moving industry. Some companies focus mainly on international moving with having websites in different languages. You will likely get help with customs and international moving insurance for your items through these companies. Some even provide educational services for future ex-pats. As you can imagine, this plays an important role in the US economy. It not only allows foreign professionals to come to the US with relative ease. But, it also helps US professionals relocate abroad. It is especially important in STEM fields as relocating to a different country is usually necessary for further education.

Military moving

The US has the most prominent military industry in the world. As such, it has a tremendous workforce backing it up, both in research and in defensive military duties. All those working in the military usually need to relocate as their duty requires. Not surprisingly, this would be a much bigger problem for both the military personnel and their families if the moving industry didn’t step in. A large number of moving companies offer military moving services. These help military personnel organize and handle relocations with relative ease. Again, we see an aspect of the US economy where the moving and storage industry plays an essential role.

Final thoughts on the role of the moving and storage industry in the US economy

As you can see, there are many aspects of the US economy where moving and storage play an integral role. From helping people relocate to find work to assisting companies in changing their commercial space. Moving industry as a whole is the literal driving force without which the US economy would be inconceivable. You can use the potency of the local moving industry to determine how strong the local economy is. Solid and stable economies usually bring in a new workforce. And the more people choose to move to a particular area, the more likely it is that a new moving company will spring up.

Autonomous vehicles

The one notable change we might see in the role of the moving and storage industry in the US economy comes with the advancement of autonomous vehicles. Namely, as self-driving vehicles become more and more advanced, we will likely see a change in how moving companies operate. As it is now, a single team takes care of a single relocation, start to finish. But, if you can automate transport, you would only need people to load and unload. While this may not sound like much, it can have serious implications for the moving and storage industry.

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Jamie Walker worked as a mover and relocation organizer for over 20 years. He now writes helpful articles for Miami Movers for Less and other websites that focus on shipping, relocations, and logistics.

business applications
Archives, Global Trade Daily, Special Reports

Cities With the Largest Increase in New Business Applications Since COVID

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The COVID-19 pandemic has been particularly hard on small businesses, which are estimated to employ nearly half of all American workers. A recent Federal Reserve Bank study noted that the pandemic caused an additional 200,000 businesses to close their doors last year, with small businesses comprising the bulk of the difference.

However, it hasn’t been all bad news for the nation’s small businesses. A real-time survey of business applications conducted by the U.S. Census Bureau offers encouraging results: the increase in business shutdowns combined with changes in consumer preferences created gaps for new entrants to fill, resulting in a strong resurgence of new businesses. Between 2019 and 2020, there was a nearly 25% increase in new business applications, and that increase has held relatively steady through 2021. About one-third of current applications are considered “high-propensity applications,” or those with a high likelihood of turning into a business with payroll.


At the industry level, the increase in new business applications is being led by the retail trade sector of the economy. When comparing the number of applications from 2019 to 2020, retail trade applications increased by 59%, followed by the transportation sector which increased nearly 35%. Further, the largest percentage increases in applications were more likely to occur in those sectors already generating the highest number of applications overall. Together, this indicates the start of a robust trend for total small business creation in the economy.

While total business applications grew markedly since the beginning of the pandemic, the strongest increases appeared in the Southeast. Mississippi, Georgia and Louisiana lead the nation with application increases of over 55%. Yet, not all states fared well, as Alaska and North Dakota each saw small, single-digit percentage decreases over the same time period. At the metro level, those reporting the largest increases in new business applications are also found in the Southeast, with a handful of locations in Texas and the Midwest also ranking highly.

The data used in this analysis is from the U.S. Census Bureau. To determine the locations with the largest increase in new business applications since COVID-19, researchers at Self Financial calculated the percentage change in new business applications from 2019 to 2020. In the event of a tie, the location with the higher total change in business applications from 2019 to 2020 was ranked higher.

Here are the large U.S. metropolitan areas with the largest increase in new business applications since the start of the pandemic.

 

Metro Rank Percentage change in business applications (2019-2020) Total change in business applications (2019-2020) Total business applications in 2020 Total business applications in 2019
Memphis, TN-MS-AR    1    +77.7% +11,554 26,431 14,877
Atlanta-Sandy Springs-Alpharetta, GA    2    +56.8% +73,365 202,603 129,238
New Orleans-Metairie, LA    3    +55.6% +10,659 29,830 19,171
Cleveland-Elyria, OH    4    +54.5% +11,302 32,045 20,743
Chicago-Naperville-Elgin, IL-IN-WI    5    +49.7% +51,394 154,758 103,364
Detroit-Warren-Dearborn, MI    6    +48.9% +26,947 82,098 55,151
Milwaukee-Waukesha, WI    7    +37.6% +5,773 21,127 15,354
Houston-The Woodlands-Sugar Land, TX    8    +37.4% +32,185 118,183 85,998
Charlotte-Concord-Gastonia, NC-SC    9    +35.3% +11,879 45,487 33,608
Birmingham-Hoover, AL    10    +35.3% +4,070 15,593 11,523
Virginia Beach-Norfolk-Newport News, VA-NC    11    +35.0% +6,683 25,783 19,100
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD    12     +33.4% +25,103 100,265 75,162
Riverside-San Bernardino-Ontario, CA    13    +32.2% +10,944 44,887 33,943
Fresno, CA    14    +32.1% +1,782 7,332 5,550
Jacksonville, FL    15    +31.8% +7,537 31,202 23,665
United States    –    +24.2% +848,210 4,356,870 3,508,660

 

For more information, a detailed methodology, and complete results, you can find the original report on Self Financial’s website: https://www.self.inc/blog/us-cities-increase-in-new-business-applications

consumer spending
Archives, Global Trade Daily, Special Reports

States With the Biggest Drop in Consumer Spending During COVID-19

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The latest surge in COVID-19 cases caused by the Omicron variant once again disrupted an economic recovery that has been uneven to date. While most jurisdictions did not resort to the same sorts of public health restrictions instituted in early 2020, many businesses struggled to operate at full capacity with employees sick due to COVID and many consumers behaving more cautiously. Industries that have been hard-hit throughout the pandemic, like restaurants and airlines, experienced new disruptions heading into 2022.

Economic challenges associated with Omicron and future variants could once again depress consumer spending, piling on top of an unusual decrease in consumer expenditures during the pandemic’s first year. For most of the last 60 years, consumer spending has increased year over year, even during economic downturns. But from 2019 to 2020, overall consumer spending fell by 2.6%, the largest year-over-year decline since the Great Recession.

COVID’s effects on consumer spending have not been consistent across all categories, which means that some industries are struggling more than others. Public health restrictions affecting certain types of businesses and consumers’ shifting preferences from spending more time at home have driven trends in expenditures. In some cases, these factors have created divergent spending trends between similar categories. For example, spending on food services and accommodations dropped by 20.5% from 2019 to 2020, while spending on groceries was up 11.2% over the same period. Similarly, recreation services—which includes businesses like sports venues and theaters—saw the largest overall decline at 28.6%, but recreational goods and vehicles saw the largest overall increase at 13.1%.

In addition to differences by spending category, declines in consumer spending also varied by geography. The region with the greatest drop in spending was the Mideast (including Delaware, New Jersey, New York, Pennsylvania, and Maryland), with a 4.07% decrease from 2019 to 2020, followed by the Far West at 4.03%. In contrast, the Rocky Mountain region had the lowest decrease, with consumers spending only 1.25% less in 2020 than in 2019.

Among states, most of the locations where consumer spending dropped the most were found in the Mideast, Far West, and New England regions. For most of these states, the declines are explained in large part by decreases in spending on recreation services, transportation services, or both. Recreation services were slow to return to full capacity in many locations because they were considered less essential and frequently likely to contribute to the spread of the coronavirus. Areas with high populations of commuters usually relying on vehicles or public transportation, like densely populated areas in the Northeast, saw declines in transportation spending with the greater transition to remote work.

The data used in this analysis is from the U.S. Bureau of Economic Analysis’s Personal Consumption Expenditures. To determine the states with the biggest drop in spending during COVID-19, researchers at Filterbuy calculated the percentage change in per capita consumer spending from 2019 to 2020. In the event of a tie, the state with the lower total change in per capita consumer spending from 2019 to 2020 was ranked higher.

Here are the states with the biggest drop in spending during COVID.

State Rank Percentage change in consumer spending (2019-2020) Total change in consumer spending (2019-2020) Per capita consumer spending (2020) Per capita consumer spending (2019) Category with the largest decrease in spending
Alaska    1    -5.4% -$2,760 $48,739 $51,499 Recreation services
Massachusetts    2    -5.0% -$2,762 $52,001 $54,763 Transportation services
Hawaii    3    -4.7% -$2,233 $45,080 $47,313 Transportation services
New York    4    -4.6% -$2,416 $49,735 $52,151 Transportation services
Minnesota    5    -4.6% -$2,129 $44,403 $46,532 Recreation services
Maryland    6    -4.4% -$2,051 $44,331 $46,382 Recreation services
California    7    -4.3% -$2,086 $46,636 $48,722 Recreation services
Pennsylvania    8    -3.9% -$1,828 $44,650 $46,478 Recreation services
Vermont    9    -3.8% -$1,888 $47,397 $49,285 Recreation services
Nevada    10    -3.8% -$1,532 $39,211 $40,743 Gasoline and other energy goods
North Dakota    11    -3.7% -$1,668 $43,945 $45,613 Gasoline and other energy goods
Rhode Island    12    -3.7% -$1,660 $42,944 $44,604 Gasoline and other energy goods
Washington    13    -3.5% -$1,647 $46,041 $47,688 Transportation services
Delaware    14    -3.2% -$1,526 $45,434 $46,960 Transportation services
Florida    15    -3.1% -$1,376 $43,615 $44,991 Transportation services
United States –    -3.0% -$1,311 $42,635 $43,946 Recreation services

 

For more information, a detailed methodology, and complete results, you can find the original report on Filterbuy’s website: https://filterbuy.com/resources/consumer-spending-covid/

auto
Archives, Global Trade Daily, Imports/Exports

U.S. States Whose Auto Industry Was Hit Hardest During COVID-19

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Amid recent concerns about inflation, rising prices for new and used vehicles have received significant attention. According to recent data from the Bureau of Labor Statistics, the price of vehicles increased by 11.8% for new cars and a whopping 37.3% for used cars from December 2020 to December 2021. Even in an environment of rising prices across the economy, the spike in vehicle prices stands out.

Many observers have pointed to ongoing challenges with the supply chain and a tight labor market as factors that are limiting supply and leading to an increase in prices. A shortage of semiconductor chips and other essential car components has hampered auto production, while backlogs at major ports are making it difficult to transport the vehicles and parts that are being produced. Manufacturers have been struggling to staff plants at full capacity with the tightness of the labor market, a situation worsened by the surge in cases from the Omicron variant. As a result of these factors, industry experts estimated that the industry could see a shortfall of about 8 million vehicles.

While many of these challenges are coming to a head now, the auto industry has struggled throughout the pandemic. At the beginning of the pandemic in early 2020, total U.S. auto exports experienced their biggest drop since the Great Recession with the onset of COVID shutdowns. As more drivers stayed home and manufacturers operated at more limited capacity, exports fell from approximately $10.5 billion in March 2020 to around $3.2 billion two months later. While monthly exports rebounded to more than $10.5 billion again by August, the industry has continued to struggle to exceed pre-pandemic levels since. In each of the first 11 months of 2021, export figures from U.S. automakers trailed the figures for the corresponding month in 2019, despite surging demand.

These ongoing struggles naturally pose greater challenges for states whose economies depend more heavily on car and auto part manufacturing. Michigan, the traditional home of the U.S. auto industry and home to giants like Ford and GM, accounted for nearly $16 billion in auto exports in 2020. South Carolina, which is home to major manufacturing facilities for BMW, Michelin, and a number of other auto parts companies, and California, which is a major center in the burgeoning electric vehicle market, are also large exporters.

While these major exporting states have been hard-hit as a result of the pandemic and could face more challenges in the near future, many other states have seen even greater declines. A total of 43 states had lower auto exports in 2020 than in 2019, but the size of the decline ranged from a 2.3% reduction all the way to a 51% decrease in exports. And the characteristics of a state’s auto industry did not spare any states from these difficulties: the states with large export losses experienced declines regardless of whether their industry concentrated in passenger vehicles, tractor trailers, motorcycles, or auto parts.

The data used in this analysis is from the U.S. Census Bureau’s Foreign Trade Data. To identify the U.S. states whose automotive industries were hit hardest by the COVID-19 pandemic, researchers at CoPilot calculated the percentage change in state automotive exports between 2019 and 2020. Researchers also calculated the percentage of total state exports accounted for by the automotive industry, as well as the automotive sector responsible for the most exports in 2020.

Here are the states whose auto industries were hit hardest during COVID.

State Rank Percentage change in auto exports (2019–2020) Total auto exports (2020) Total auto exports (2019) Auto exports as a share of total state exports Largest auto sector
Mississippi     1     -51.0% $577,561,521 $1,178,914,774 5.6% Passenger Vehicles (Internal Combustion)
Washington    2     -49.2% $570,863,349 $1,124,850,637 1.4% Road Tractors for Semi-trailers
Pennsylvania    3     -45.0% $1,136,532,516 $2,066,302,460 3.0% Motorcycles
Wyoming    4 –    36.0% $23,253,092 $36,316,995 2.0% Bodies for Road Tractors
Virginia    5     -35.6% $832,570,089 $1,293,755,497 5.1% Road Tractors for Semi-trailers
Arizona    6     -35.2% $387,614,930 $598,240,715 2.0% Motor Vehicles for Goods Transport
Tennessee    7     -34.5% $2,523,963,500 $3,851,343,633 9.0% Passenger Vehicles (Internal Combustion)
North Carolina    8     -33.2% $900,084,365 $1,348,192,451 3.2% Drive Axles
Ohio    9     -32.9% $5,933,273,841 $8,848,509,170 13.2% Passenger Vehicles (Internal Combustion)
Arkansas    10     -30.7% $153,882,650 $221,979,604 3.0% Suspension Shock Absorbers
Indiana    11     -30.5% $7,012,902,262 $10,089,583,845 19.8% Gear Boxes
Michigan    12     -29.9% $15,987,107,753 $22,813,060,777 36.0% Motor Vehicles for Goods Transport
Delaware    13     -27.3% $291,052,509 $400,590,517 7.4% Passenger Vehicles (Internal Combustion)
Maine    14     -24.2% $34,631,865 $45,680,861 1.5% Trailers & Semi-trailers
California    15     -23.3% $11,085,046,400 $14,454,461,847 7.1% Motor Vehicles (Electric Motor)
United States    –     -21.1% $105,560,728,656 $133,834,667,670 7.4% Passenger Vehicles (Internal Combustion)

For more information, a detailed methodology, and complete results, you can find the original report on CoPilot’s website: https://www.copilotsearch.com/posts/states-whose-auto-industries-were-hit-hardest-by-covid-19/

Fed
Archives, Global Trade Daily, News

US Fed: A fata morgana hiking cycle?

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In early January, the US Federal Reserve’s communications pointing to more hikes and an earlier balance sheet run-off, together with CPI reaching a yearly rate of 7% in December, have triggered a surge in long-term US yields. Over a short span of two weeks, US 10y Treasuries yields rose 24bp from 1.5% to 1.75% and temporarily reached 1.9% (Figure 1).

Figure 1: Evolution of US 10y Treasury yield (last 2 months).

In total return, this was the largest decline of 10Y US Treasuries over the last four decades. Only in February 1980, when Chairman Volcker raised the Fed Funds rate to 21% did long-term US Treasuries have a worst two-week performance, and this was against the background of much lower growth than today. For some, this is enough to (once again) claim the switch to a new regime, where “low for longer” is replaced by rising yields, driven by higher inflation uncertainty and growing interest rate risk. For us this view reflects mostly tactical noise rather than the underlying dynamics of recent yield movements. Over the recent days, US 10y Treasury yields have consolidated again at 1.74%.

Bonds markets seem have become more confident about the near-term US recovery rather than worry about incipient stagflation. The components of US nominal yields show that the recent increase was not caused by the risk component (term premium) but by a higher expected nominal short-term rate. The inflation expectations embedded in this rate remain stable, but the implied expectations for the real rate have risen (real short-term rate). The real short-term rate is closely linked to the economic outlook. In other words, the recent yield movement can be explained by increasing confidence among market participants that the upcoming Fed rate hikes (four hikes are currently priced in for this year) are appropriate and will not derail real growth. However, residual skepticism remains. The risk premium associated with the real short-term rate (real term premium) remains negative indicating limited potential for higher longer-term rates in a sustained growth cycle. Thus, we are not dealing with a risk surge, but with a re-rating of the growth scenario (Figure 2).

Figure 2: Decomposition of US 10y Treasury yield*

 

Don’t be fooled by real yields based on breakeven rates. From this growth story one could hastily derive a considerable upside potential for nominal yields especially in view of still clearly negative real yields (nominal yield – breakeven). But this is a flawed reading. The breakeven rate (derived from TIPS ) is not pure measure of inflation expectations and is subject to substantial market distortions. The US 10y breakeven rates – untypically – trade 50bp above their fair value due to a combination of lack of liquidity, high demand, and limited supply (Fed holding around 20% of the outstanding TIPS volume). Using the fair breakeven value (liquidity-adjusted) to calculate real yields, we see they are almost come back to pre-crisis levels (which is nearly the same as the sum of the real rate expectation and the real term premium in Figure 2 above). The US growth story is thus already priced in and provides very little upside for nominal yields (Figure 3).

Figure 3: Real yields back pre-crisis when adjusted for liquidity distortions*

However, changes in the duration of US Treasuries might provide some small upward pressure on the yield curve. Markets are also repricing the declining dampening stock effect of the Fed’s bond holdings on the US curve. With the upcoming quantitative tightening (QT), the share of duration-bearing securities in the private sector’s balance sheet is going to increase while short-term reserves are becoming scarcer. The additional duration supply translates into upwards pressure on yields. Currently, the QE-induced duration extraction is still dampening 10y US Treasuries by 130bp. With quantitative tightening we expect this effect to diminish by 20bps by the end of the year. However, a lower fiscal impulse than expected (e.g., if the Build-Back-Better framework does not pass) could also result in lower financing need by the US government and reduce the net supply of Treasuries, which could put downward pressure on yields and partly balance the effect from quantitative tightening.

The Fed might break the hiking cycle earlier than markets expect.  The US monetary stance has undeniably become more hawkish. Given the tightening labor market, the expanded balance sheet and political pressure to fight inflation the risk reward of not tightening has indeed become too high. Cautious tightening can avoid overshooting inflation becoming embedded in expectations. However, the Fed also knows that tightening will not fight supply-side constraint-driven inflation. From this side, the pressure is going to ease over the year as we expect the inflationary pressure to abate. Our inflation tracker is already pointing at peak in Q1 2022 (Figure 4).

Figure 4: Inflation in the U.S. may peak in Q1 2022*

Sources: Refinitiv, Allianz Research

*US Inflation Tracker: equally weighted and normalized composite measure comprising 15 sub-segments (underlying trends (modified/trimmed measures), forecasts, market-based inflation measures, expected inflation implied by term structure models, monetary aggregates, consumer and producer price components, labor market indicators, commodity prices, corporate margin & profitability, and proxies for price effect from supply chain disruptions). Official measures: equally weighted and normalized composite measure comprising headline and core inflation reported by national authorities.

The normalization of the liquidity premium in the TIPS market, which should bring down breakeven rates, should also help to reduce the risk of de-anchoring inflation expectations. Instead of CPI and FOMC minutes, the focus of fixed income investors should lie on economic activity and monetary and financial conditions (MFC).

Figure 5: US Financial Conditions and ISM Manufacturing Index
Our baseline is still a cycle with three rate hikes this year and eight in total. This remains a very moderate normalization path by historical standards. On average, nominal tightening in the hiking cycles of the last 50 years reached 3.9pp and real tightening 2.8pp. For the upcoming cycle, we see tightening at only 2.0pp in nominal terms and 2.1pp in real terms. But if the growth momentum slows down further (e.g. ISM falling below 50, persistently weak retail sales as in December etc.) and if we see a noticeable tightening of MFC, then the Fed could break the tightening cycle after only two or three hikes. From today’s standpoint, 3-4 hikes would then have to be priced out. The market would switch from bear-flattening to bull-steepening (Figure 5).

Financial markets signal a shortened cycle. The 2y10y steepness of the US curve is already very flat compared to earlier lift-off phases (75 bps vs an average of 120bps in the 2 months prior to lift-off). Looking at the swap forward curve, we can already see inversion patterns that previously only appeared in late phases of hiking cycles, usually 2 to 3 hikes before the peak (Figure 6). These signals are somewhat at odds with the aggressive pricing on the money market, where currently 6-7 hikes are priced for the next two years.
Figure 6: Forwards at inversion point even before the hiking cycle started

Equity market developments seem to confirm a shortened cycle. Over the last 50 years, 85% of the Fed rate hikes have taken place at a moment when the S&P 500 has experienced a 12-months drawdown of less than 10%. Today we are already at -8.3%. So, we are approaching an area where rate hikes are very rare (16% of all hikes). When they took place, it was mostly in the very late phase of the cycle (Figure 7). One can, of course, emphasize the uniqueness of this post-pandemic cycle and argue that the Fed should not care about equity markets. However, the past has shown that the suppression of risky asset volatility and preservation of the wealth effect feed into the reaction function. For us, behind the tactical noise signals are piling up that the biggest risk in the U.S. bond market might thus not come from the Fed falling behind the curve, but from many market participants positioning themselves too far ahead of the curve. Like the real economy went through a full cycle in less than 2 years, markets might go through monetary cycle without substantial hiking ever happening.

Figure 7: Fed rate hikes and S&P 500 12 Drawdown

Even in the long run US yields will remain subdued. It is difficult to imagine long-term rates reestablishing clearly above 3% on a sustained basis. We currently see the long-term (5 years ahead) nominal equilibrium interest rate in the U.S. at 2.6% of which 0.6% are attributable to the real neutral rate. This equilibrium rate could only shift substantially above 3% if we experience extreme monetary tightening or if massive government spending creates a permanent boost to potential GDP. For some, President Biden’s infrastructure plan could trigger such a GDP boost. However, to double the neutral rate relative to our baseline scenario, trend growth would have to reach around 3.5% (against currently 1.8%) without triggering a permanent surge in inflation. But the equilibrium rate could also reach 3% in a negative stagflation scenario.

Figure 8: US equilibrium rate scenarios for a 5-year horizon*

In that case, the driver would be permanently de-anchored inflation expectation (over 3%) while the neutral interest rate would decline as the growth potential is impaired. On a fundamental basis it is therefore hard to justify the regime shift narrative. It is much more likely that, behind all the current market noise, the low for longer regime will prevail (Figures 8 and 9)

Figure 9: Scenarios for US real neutral rate (r*) for a 5-year horizon

butter prices
Archives, Global Trade Daily, News

U.S. Butter Prices Soar 40% y/y on Labour Shortage and Rising Packaging Costs

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IndexBox has just published a new report: ‘U.S. – Butter – Market Analysis, Forecast, Size, Trends and Insights‘. Here is a summary of the report’s key findings.

The average price for Grade AA butter in the U.S. amounted to $2.02 per pound on December 11, 2021, increasing by 40% from the same period last year. Reducing milk cow herd, labour shortage, and the rising packaging materials costs constrain production growth, leading to insufficient supply in the market that results in the butter price surge. Demand for butter typically picks in Q4, when Americans consume more holiday cookies and other traditional dishes. In December, butter prices picked up 3.7% compared to the figures a month earlier.       

According to recent USDA data, prices for Grade AA butter averaged $2.02 per pound for the week ending December 11, 2021, a 40%-increase compared to December 2020. The main reason for that spike was the insufficient supply owing to the reducing milk cow herd and the labour shortage. Over January-October 2021, total butter production reduced by 11% to 1.6M lb against the figures of the same period last year. The rising cost of packaging materials also contributes to higher butter prices. Over the past month, butter prices rose 3.7%, driven by strong seasonal demand. The current challenges are expected to persist in the following year, and butter prices will climb further.

US Butter Imports in 2020

Last year, approx. 33K tonnes of butter were imported into the U.S., waning by -23.9% against 2019. In value terms, the purchases declined to $277M (IndexBox estimates).

Ireland (25K tonnes) constituted the largest butter supplier to the U.S., accounting for a 77% share of total volume. Moreover, butter imports from Ireland exceeded the figures recorded by the second-largest supplier, New Zealand (3.1K tonnes), eightfold. The third position in this ranking was occupied by France (1.4K tonnes), with a 4.1% share.

In value terms, Ireland ($222M) constituted the largest butter supplier to the U.S., comprising 80% of total imports. The second position in the ranking was occupied by New Zealand ($19M), with a 7% share of total imports. It was followed by France, with a 4.8% share.

In 2020, the average annual growth rate of value from Ireland stood at +1.4%. The remaining supplying countries recorded the following average annual rates of imports growth: New Zealand (-18.6% per year) and France (-8.2% per year).

Source: IndexBox Platform

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Archives, Best Cities, Features, Global Trade Daily

TOP 20 U.S. CITIES FOR GLOBAL TRADE

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The year 2020 was like no other for global trade. Even when news of the coronavirus outbreak in China began to be picked up on U.S. airwaves, few could have imagined quite how far-reaching and devastating the pandemic’s impact would become. And we are still feeling the effects both in public health and economic terms today. 

This certainly adds an extra dynamic to the latest list of top exporting cities in the USA. Despite the economic standstill caused by lockdowns and restrictions on movement of goods and people, there are a handful of cities that actually managed to increase their year-on-year value of goods exported in 2020–take Corpus Christi and Portland, both able to sneak into the top 10 as a result.

They join the usual suspects such as Houston, New York and Los Angeles, which despite suffering substantial losses in global trade because of the pandemic still comfortably make the top three. 

Indeed, 2020 was still a big year for the 392 metropolitan areas of the United States, which in total exported $1.3 trillion in goods. Although this is a $194 billion drop on 2019, almost one-in-four metro areas grew their export trade, demonstrating a healthy sign of resilience as the U.S. economy seeks to bounce back from a difficult period. 

Read on to find out which other cities complete the list of America’s most valuable exporting hubs, which is comprised using metropolitan area export trading data from the International Trade Administration. 

1 – Houston, TX 

Total value of goods exported in 2020: $104.538 billion

The Houston metropolitan area was by far the largest exporter last year, amassing well over $100 billion of goods sales to markets abroad. Almost $18 billion of this went to Mexico, with Canada, Brazil, China and Japan the other key destinations. Oil and gas, chemicals and petroleum and coal products dominate Houston’s exports, between them accounting for around 80% of export revenue. Whether by land, air or sea, Houston offers an impressive array of logistical and distribution channels to move goods to other countries around the world, including the No. 1 foreign trading port in the United States. Its location, which is equidistant from East and West coasts, also provides strategic advantages. 

2 – New York, NY

Total value of goods exported in 2020: $75.745 billion

Although exporting activity dropped by more than 13% in value last year due to the pandemic, New York is still comfortably the second biggest generator of global trade in the country. Canada is comfortably its largest trading partner, with more than $11.6 billion of exports heading across the border in 2020. Other key export destinations for New York include Switzerland, Mexico, Hong Kong and China. In terms of sectors, chemicals, metals, computer and electronics, and transportation equipment represent the most prolific in terms of goods exported. The New York Governor’s Office also recently unveiled the state’s 2021 infrastructure plan, a $306 billion program which will help to fuel export growth in future years. 

3 – Los Angeles, CA

Total value of goods exported in 2020: $50.185 billion

Los Angeles, thanks to the ports of Los Angeles and Long Beach, is home to the largest seaports complex in the western hemisphere. It is therefore no surprise that the city ranks highly as a top center for global trade: In 2020, just more than $50 billion of goods were exported, representing a steep decline of nearly 18% on 2019. However, despite being badly hit by the pandemic, Los Angeles still sent several billions of dollars’ worth of goods to Mexico, Canada, Japan, China and Germany, which make up its top five export markets. Computer and electronics goods are the city’s biggest export, with just over $10 billion in international sales in 2020. 

4 – Chicago, IL

Total value of goods exported in 2020: $41.279 billion

The Windy City ranks fourth in the USA for global trade, with exports of more than $41 billion in 2020. Unlike many other major U.S. cities, Chicago was relatively shielded from the pandemic impact in terms of exports, only suffering a 2.7% drop on 2019 levels. Canada and Mexico are its largest exporting destinations, followed by China, Germany and Japan, with chemicals being the most valuable export sector ($7.596 billion). Chicago’s other key exporting industries include computer and electronics, transportation equipment, machinery and agricultural products. Its central location also makes it a strategic hub for business, reflected by the fact that a quarter of all American freight traffic passes through the city. 

5 – Dallas, TX

Total value of goods exported in 2020: $35.642 billion

Dallas was less protected against the economic standstill created by the COVID-19 pandemic, suffering a 9.7% drop in export businesses during the course of 2020. However, the city still managed to export the fifth most goods in terms of value last year. Around half of this income came from the transportation equipment and computer and electronics sectors, with U.S. neighbors Canada and Mexico once again representing the top two exporting destinations. Dallas is in an extremely well-connected part of the country, with Texas being the top state for rail miles and public roads and also home to formidable port and airport facilities. 

6 – New Orleans, LA

Total value of goods exported in 2020: $31.088 billion

New Orleans is one of America’s most important cities when it comes to the global trade of agricultural products. Last year, more than $15.7 billion of export income was derived from this busy sector, with other significant contributions coming from petroleum and coal products, processed foods, oil and gas, and chemicals. Unlike many of its fellow heavyweight exporting cities, New Orleans’ primary exporting destination is China by some considerable distance, with $7.864 billion of goods being sent there in 2020. Mexico is a distant second, registering $2.9 billion in imported goods from the city. Japan, the Netherlands and Colombia make up the rest of New Orleans’ top five export markets. 

7 – Detroit, MI

Total value of goods exported in 2020: $30.715 billion

Detroit is another city where a specific exports sector dominates. In this case, it is transportation equipment, which accounted for over half ($16.686 billion) of all exporting value in 2020. Among the key transportation goods produced and exported from Detroit are spark ignition engine trucks weighing over five tons, large and mid-sized cars, as well as parts and accessories. The city’s exports took a huge hit as a result of the pandemic, 2020’s figure being more than 25% down on 2019’s value. Mexico and Canada, meanwhile, continue to be Detroit’s major export destinations with the third and fourth most valuable markets being China and Spain respectively. 

8 – Miami, FL

Total value of goods exported in 2020: $29.112 billion

Three of Miami’s top five exporting destinations are with southern neighbors, most notably Mexico, Brazil and Colombia, which between them account for about a sixth of all exports. This is no surprise given Miami’s favorable location on the southeastern tip of the United States, but the city also makes it easy for Latin American businesses to trade–helped by the fact it is blessed with multimodal infrastructure and is considered the America’s second-largest financial hub. Its most exported goods include computer and electronic products, transportation equipment and chemicals, with other key exporting destinations being Canada and Germany. Last year saw Miami take a heavy pandemic hit, with exports down 18% versus 2019. 

9 – Corpus Christi, TX

Total value of goods exported in 2020: $28.784 billion

Corpus Christi is America’s foremost oil and gas export hub and is almost unique in registering a year-on-year growth in export revenues in 2020, which were up by $1.97 billion (7.3%). The Port of Corpus Christi saw a massive 65% growth in crude shipments last year, a remarkable feat given the immense volatility experienced in the global crude market. A major reason for this growth has been the recent development of pipeline infrastructure into the port from key production sites in western Texas. Corpus Christi’s major exporting destinations are mostly found in Europe and Asia, with the top five export markets comprising China, the Netherlands, the UK, South Korea and Taiwan. 

10 – Portland, OR

Total value of goods exported in 2020: $27.824 billion

Completing the top 10 U.S. cities for global trade is Portland. Like Corpus Christi, it saw a considerable rise in the value of exported goods in 2020, reaching over $28.8 billion and growing by 17.1% ($4.062 billion) on 2019 export revenues. Given its proximity to Canada, it is little surprise to see its North America neighbor ranking in Portland’s top three exporting destinations. However, the city does far more business with Mexico and especially China, which alone accounts for more than a third of all export income ($9.784 billion). Here, there is strong demand for computer and electronics products, as well as machinery and agricultural goods. 

The rest of the top 20 

11 – El Paso, TX ($27.154 billion)

12 – Atlanta, GA ($25.790 billion)

13 – San Francisco, CA ($23.864 billion)

14 – Seattle, WA ($23.850 billion) 

15 – Boston, MA ($23.234 billion)

The next highest-ranked group of cities sees us journey around the States, from El Paso in the South to Seattle up in the far Northwest. 

El Paso just misses out on featuring in the top 10, but not by much. It’s huge trade with Mexico saw it amass more than $27 billion in exports in 2020, the majority of this involving computer and electronic goods. Next is Atlanta, which relies heavily on transportation equipment exports for its revenues, with Germany, Canada and Mexico all acting as key trading destinations. San Francisco adds another Californian city into the top 20 for global trade thanks to its notorious technology scene; Belgium, Canada and the three major East Asian economies of China, Japan and South Korea being the most valuable export markets there. Seattle also enjoys sizable export activity with China and nearby Canada, most notably in transportation equipment and food products. Completing the top 15 is Boston, which only saw a slight drop of 1.2% in exporting revenue in 2020, once again its key markets being China and Canada, along with Germany, Mexico and Japan. 

16 – Philadelphia, PA ($23.022 billion)

17 – Cincinnati, OH ($21.002 billion) 

18 – San Jose, CA ($19.534 billion) 

19 – San Diego, CA ($18.999 billion) 

20 – Minneapolis, MN ($17.109 billion)

The final group making up the top 20 U.S. cities for global trade starts with Philadelphia, which is one of the country’s most prolific traders with the United Kingdom. Indeed, the UK is second only to Canada in terms of the value of goods received from the Pennsylvanian city, with the chemicals sector being the most valuable exporter. 

In Ohio, Cincinnati makes the top 20 despite seeing a drop in exports of 27% last year. Despite this, the city still managed to export more than $10.5 billion of transportation equipment. The next two largest exporting metropolitan areas both reside in California, with San Jose ranking No. 18 thanks to its strong technology sector exports and healthy trading relations with major Asian economies such as China, Taiwan and Japan. San Diego, at No. 19, enjoys far stronger trade with Mexico, its main exporting sectors being manufactured goods, computer and electronic products, chemicals and machinery. Completing the top 20 is Minneapolis, whose key export destinations include Canada, Mexico and China, with strong exporting activity in the machinery, chemicals and electronics sectors. 

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How the ICC Plans to Restructure Global Trade Finance for a More Sustainable Global Economy

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One of the most enduring effects of the COVID pandemic has been the disruption of the global supply chain. Micro, small, and medium enterprises (MSMEs) constitute the majority of companies and employers worldwide and are major contributors to the total global gross domestic product. They frequently encounter more difficulties than other companies because they have less access to global trade finance systems.

The International Chamber of Commerce (ICC) viewed the pandemic as an opportunity for positive disruption in favor of all global financial market participants. Accordingly, in August 2020, it created an Advisory Group on Trade Finance (ATF) and charged it with addressing trade finance challenges that hinder full participation by MSMEs. 

The ATF, in a joint effort with McKinsey and Fung Business Intelligence, recently released a proposal for restructuring global trade finance to better promote financial inclusion and sustainable finance. The report proposes a ten-year, three-phase process for modernizing and standardizing global trade finance systems through the introduction of an “interoperability layer.” 

In this article, we’ll summarize the report’s primary recommendations, provide an overview of the structure of the proposed interoperability layer, and discuss the anticipated effects on MSMEs worldwide. 

The current global trade finance market

In 2020, the finance market covered transactions totaling $5.2 trillion, or approximately 6% of the global gross domestic product. For financial institutions, this translated into 2% of their total revenue or roughly $40 billion. However, despite the size of the market, a finance availability gap of $1.7 trillion still exists, largely affecting MSMEs.

Fintech companies are relatively new participants in the market. However, they are actively working to develop new products at every stage in the supply chain, and the ICC report looks to leverage the capabilities of fintechs.

The vast majority (85%) of global trade finance addresses documentation issues associated with cross-border transactions, such as letters of credit, international guarantees, and international bills of lading, among other services. Documentation products and services also deal with regulatory and compliance issues, for example, anti-money laundering rules. The remainder is split between buyer-led financing (10%) and supplier-side finance (5%). 

What trade finance challenges does the proposal address?

Despite the sizable, robust trade finance market, there is substantial room for improvement, especially as it relates to MSMEs. According to the World Bank, as of 2017, approximately 65 million MSMEs were credit constrained. There are several reasons that MSMEs are less than full participants in the global trade finance arena, all of which the ICC seeks to rectify with its current proposal. Some of the most significant issues facing MSMEs are:

Lack of access to liquidity

Traditionally, MSMEs have had more difficulty accessing trade credit than larger corporations because they have less available collateral or are unable to meet established strict credit requirements. Credit requirements have not evolved to reflect changes in the global economy and there is a dearth of alternative financing options for international transactions. Because of this, MSMEs frequently find themselves without available credit for purchases or sales. 

Transaction complexity

The disparate requirements for international transactions and financing worldwide impose additional challenges on smaller firms with more limited resources. Just keeping track of the different requirements for each jurisdiction can be an overwhelming task. And when it comes time to meet the documentation requirements for each transaction, the burden only increases.

Limited access to B2B markets

B2B marketplaces create tremendous efficiencies in the market by pairing suppliers and purchasers quickly and simply. MSMEs, however, often lack either the knowledge base or the resources to gain access to these marketplaces. And for MSME suppliers, financing, capital, and cash flow issues can prevent them from establishing themselves as effective participants in B2B markets. 

What is the ICC’s reconception of global finance?

The ICC proposes a three-phase, ten-year plan for developing globally accepted standards that serve as a framework for common systems, all of which come together in an interoperability layer. The interoperability layer will not be hardware or software, but instead a virtual construct that sets the baseline standards and best practices supporting trade finance digitization. Digitization is increasingly important to MSMEs, after all. According to recent studies, 43% of small businesses now fully rely on online banks. 

Ultimately, the ICC envisions new standardized and shared architectures equally accessible to all market participants. The interoperability layer would replace the patchwork of standards and protocols that currently exist and fill regulatory gaps by developing a unified and consistent set of standards and practices. The proposed interoperability layer accomplishes three main missions. 

First, it encourages widespread adoption of existing trade finance standards to bring market participants into a common network. Second, it creates new standards and processes to fill existing gaps, including standards for sustainable finance. 

There are two main areas where the ICC identifies specific needs for additional standards, both of which focus on easing and increasing digital transformation of trade finance: uniform data models and API standards. API standards constitute an immediate need because many banks currently suggest that the lack of such standards inhibits their ability to develop strategies for API usage in their operations.

Finally, it creates operational playbooks for market participants that embody the full set of standards. The consolidation of standards and protocols into the interoperability layer will occur with full knowledge of the challenges that prevent or hinder participation by entities with fewer resources or credit histories. With simplified access to the trade finance system, more players at every level will be able to join. 

As for governance, the ICC envisions an industry organization or consortium overseeing the development, implementation, and ongoing management of the interoperability layer. The governing body should include participants from all functions, regions, and company sizes.

How does the interoperability layer benefit MSMEs?

The interoperability layer has benefits for all market participants, but the impact for MSMEs is particularly notable. With new standards and processes for assessing transaction risks, MSMEs will gain greater access to alternatives for credit and liquidity. 

Recent research suggests that traditional bank credit assessment models underperform newer tech-based models for determining creditworthiness. Applying real-time data and highly advanced analytical tools like AI, newer models provide a more timely and accurate assessment of a firm’s payment capabilities. In turn, better credit scoring results in more efficient allocation of resources, particularly for smaller firms like MSMEs.

In addition, new documentary standards and digitization of documentation requirements will reduce costs for all market participants. Because these costs disproportionately impact MSMEs, they will see the greatest benefit. But as finance processes become more streamlined and more participants enter the market, the large financial institutions will see corresponding revenue increases which, coupled with lower expenses, lead to higher profit.

Will the interoperability layer promote sustainable finance?

The ICC report recognizes that sustainability is an increasingly important issue for corporations and governments. However, there is currently a lack of standards for sustainable finance, including the lack of a commonly accepted vocabulary. One of the major tasks the ICC envisions is the creation of a standard taxonomy for sustainable finance that all market players can apply in future transactions. Once the market has a common language, it can better develop standards for applying the principles of sustainability in the global trade finance industry. 

Time will tell if the ICC proposal gains any traction. Further digitization is inevitable with or without the report. But building a common framework for the digitization that makes it easier for firms of all sizes to effectively participate in international trade is a valuable goal.

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Accepting Gas as Sustainable Will Hurt Korea’s Green Finance Credentials

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After six months of resisting industry calls to add liquefied natural gas (LNG) to its green taxonomy, the South Korean government this week finally succumbed to gas lobbyists. 

This is surprising as, only 2 weeks ago, President Moon Jae-in made a well-received, new emissions pledge—cutting the country’s greenhouse gas emissions to 40% by 2030.

The obvious dichotomy here is that recognizing gas and LNG as an environmentally sustainable “transition” fuel will likely lock South Korea into a high-emitting future, which directly contradicts the policy and market incentives created by President Moon’s new emissions reduction targets.

Released last week, the draft green taxonomy, known locally as the K-Taxonomy, prescribes an end-use emission technical screening criteria of 320g of carbon dioxide (CO2) per kilowatt-hour (kWh). A life-cycle emission standard is also expected, but it will only apply from 2025.

This means that new unabated LNG-power projects, of which around 10 gigawatts are expected to flood South Korea’s energy market by 2025, would qualify for green bond and loan financing if the draft K-Taxonomy is finalized without changes.

Emissions-wary ESG investors should be on alert

South Korean green debt amounted to US$42.8 billion on 30 September 2021, according to Bloomberg New Energy Finance. A third of it, around US$14.22 billion, funded power and energy companies.

If the current draft of the K-Taxonomy proceeds as is, ESG investors may find themselves inadvertently backing gas.

Gas is a fossil fuel that contributes carbon and methane to the atmosphere through its combustion, with lifecycle emissions that are dangerous and significant. Moreover, methane from gas has a warming effect up to 80 or 90 times more powerful than carbon over a 20-year period, making gas worse for the climate than coal in the short term.

The tension around the limited role for gas in energy transition is evident in the taxonomy work playing out in all global markets.

After much controversy, the European Union (EU) accepted gas-powered generation as a ‘transitional’ asset class under its Sustainable Finance Taxonomy, provided that a project’s lifecycle carbon emissions are limited to 100g CO2 per kWh.

At this specification, gas-powered projects in the EU will likely require the use of carbon capture technology (CCS), which is yet to be proven economically or technically viable at scale anywhere in the world. Under these conditions, gas is unlikely to be funded in the short to medium, or even the long term, under the EU’s taxonomy.

The K-Taxonomy is expected to be finalized by the end of 2021, and with its current draft not consistent with the gold-standard EU Taxonomy, investors are right to be wary.

The Moon administration risks missing out on new pools of global capital

With the inclusion of gas in the K-Taxonomy, Korean policymakers have effectively signaled they aren’t up to the task of leading market development with a green taxonomy.

Instead, they are showing a preference for remaining in lock-step with emerging market Southeast Asian counterparts who have flagged their intention to recognize gas-powered generation as “green”.

This puts South Korea at risk of deterring serious ESG investors who typically prefer “dark green” assets—solar, wind and geothermal for example.

The United Kingdom’s (UK) inaugural sovereign green bond issued in September 2021 demonstrated that risk when it provided a mixed portfolio of green and controversial assets like “blue hydrogen”, which uses methane gas in its production. Several leading debt investors immediately expressed criticism over the sovereign’s opportunistic ‘green’ bond and avoided it entirely.

China is working with the EU to harmonize their respective taxonomies

By contrast, China—the largest green debt market in the region—took a different and much more strategic approach, learning from market trends and adapting.

Its first green taxonomy in 2015 categorized “clean coal” as a green project that qualified for the issuance of green bonds, drawing widespread criticism, particularly from foreign investors.

Recognizing the significance of a truly green taxonomy, in mid-2021, China removed fossil fuel-related projects and the new Green Bond Endorsed Project Catalogue—its equivalent green taxonomy—now excludes gas, LNG and coal-fired power activities.

Like South Korea, China relies on burning fossil fuels to power the country. However, President Xi Jinping’s pledge to accelerate the country’s transformation to a green and low carbon economy, and to achieve carbon neutrality before 2060, has opened the door to a much more strategic view on how China’s green finance market should develop, and which technologies should be incentivized.

China is also working with the EU to harmonize their respective taxonomies by the end of 2021. This is a positive initiative between jurisdictions in response to investor requests for a common standard on green or sustainable projects. The move also indicates that the Asian giant is ready to compete for global green capital.

China understands that ESG-focussed investors have become more forensic in their research and decision-making on what the different taxonomies recognize.

More notably, China’s mindset for justifying green energy activities appears to be unfazed, at least for now, by its need to finance new coal and gas-related projects, said to be required to see them through the energy transition phase—reasoning that its Asian counterparts, including South Korea, have defended and used to classify their own gas-powered projects as green.

But fossil fuel projects have a long history of being successfully financed. The existence of a green or sustainable finance taxonomy does not prevent assets or projects that the taxonomy excludes from being funded through conventional sources of finance. As in the past, fossil fuel power projects will continue to raise funds through traditional non-labeled debt market instruments.

Investors want green taxonomies

Meanwhile, investors around the world are urging governments to step up and commit to clear, strong and investable policies that will unlock the capital needed to transition to a net-zero economy.

Despite its now hollow new emissions pledge, the Moon administration appears unprepared to rise to the occasion. It risks missing out on new pools of global capital if it does not get the policy settings right, and instead chooses to pander to the fossil fuel industry.

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Christina Ng is a Research and Stakeholder Engagement Leader – Fixed Income, Institute for Energy Economics and Financial Analysis (IEEFA).