Container shipping and US business cycle fluctuations

Lutz Kilian, Nikolaos Nomikos, Xiaoqing Zhou 15 July 2021

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The globalisation of the economy since the 1990s has gone hand-in-hand with an expansion of seaborne container trade. With 90% of non-bulk dry cargo globally being shipped by container, there is a close relationship between the volume of container trade and domestic economic activity (e.g. Altomonte et al. 2019, Cosar and Demir 2017). For example, domestic manufacturing firms rely on imports of containerised raw materials and intermediate goods and containerised exports of finished products, while consumers routinely purchase finished goods arriving in the US by container. 

Global supply chains depend on container trade

Disruptions of container trade may arise for many reasons, including shipping delays, port congestion, and labour strife. Any disruption in the supply chain elsewhere in the world is also likely to cause delays in container shipments. These delays can cause large and widespread disruptions in industrial production in the US. A shortage of semi-conductors in Asia, for example, may slow the production of automobiles in the US, while also restricting the availability of consumer electronics for purchase in the US. Likewise, changes in trade policy may cause disruptions to the supply chain, as exemplified by some of the policy shifts under the Trump administration. 

The macroeconomic importance of disruptions of global supply chains is well recognised among policymakers. For example, in a 2006 report, the Congressional Budget Office stressed that “[c]ontainerized imports include both finished goods and intermediate inputs, some of which are critical to maintaining U.S. manufacturers’ … supply chains. Such supply chains … leave manufacturers vulnerable to disruption if a necessary part does not reach an assembly plant in time. The lack of key parts could reduce output, employment, and income for individual companies by amounts larger than the value of the delayed part—and in areas and businesses far removed from the port where a disruption occurred” (p. 1). Yet, there has been little or no quantitative analysis of this problem due in part to the lack of suitable data (Cernat 2014 discusses the data revolution in international trade research).

Keeping track of North American container trade

In a recent paper (Kilian et al. 2021), we developed a monthly index of the volume of North American container trade starting in 1997. This index not only shows sustained declines in the volume of container shipping associated with the Great Recession and the Covid-19 recession, but also large fluctuations associated with frictions to container trade such as the labour strife on the Pacific coast in 2014/2015 (see Figure 1).

Figure 1 North American container trade index, January 2008 to March 2021

Notes: Based on the number of twenty-foot equivalent (TEU) containers processed in the major North American ports. Seasonally adjusted and log-linearly detrended. 

Incorporating container trade into macro models 

As we show in our paper, this index can be incorporated into a structural vector autoregressive model of the US economy that includes, in addition, a measure of real personal consumption and US manufacturing output. The model facilitates the identification of shocks to domestic US demand as well as foreign demand for US manufactured goods, while accounting for unexpected frictions in North American container trade associated with shipping delays, port congestion, labour strife, and foreign supply chain bottlenecks. The model shows that, on average, shocks related to frictions in the container shipping market have a nontrivial effect on the US economy. They account for 29% of the variation in US manufacturing output relative to trend and 38% of the variation in detrended real personal consumption.

Implications for the business cycle

The model may also be used to compare the determinants of US manufacturing output and real personal consumption during the Covid-19 recession of 2020-21 and the Great Recession of 2007-09. We show that, unlike during the Great Recession, when a gradual decline in manufacturing output driven by lower domestic demand was reinforced by a persistent decline in foreign demand, the primary determinant of the US economic contraction in early 2020 was a sharp drop in domestic demand. Moreover, whereas lower domestic demand caused only a modest decline in real personal consumption during the Great Recession, it created a sharp drop in real personal consumption in 2020.

The recovery of US real personal consumption

The central question of interest for policymakers is to what extent US real personal consumption has recovered relative to its trend since the pandemic started. The raw data paint an encouraging picture. For example, detrended real personal consumption of goods and services as of March 2021 had recovered to 94% of its level in February 2020, right before the pandemic slowed the US economy. This evidence may seem to suggest that domestic demand in the US had all but recovered, but a decomposition of the data based on the structural model reveals that the domestic demand component of real personal consumption had only recovered to 78% as of March 2021. The difference is accounted for by strong tailwinds from positive foreign demand shocks and especially from favourable container market shocks.

Consistent with anecdotal evidence that consumers persisted in buying goods throughout the pandemic, even as they curtailed purchases of many services, a similar analysis for real personal goods consumption shows that consumer purchases of goods not only were much less susceptible to the downturn in 2020, but have been booming as of late. By March 2021, they had recovered by 191%, compared with only 94% for overall consumption. While other shocks also contributed to this expansion, it is mainly driven by the domestic demand component, which alone propels goods consumption to 150% percent above pre-pandemic levels. 

Further disaggregating these results into durable and nondurable goods consumption shows that the domestic demand component of the consumption of durables dropped much more in early 2020 than that of overall goods consumption. This drop is less likely to reflect a drop in latent consumer demand than the inability of manufacturers to deliver durable goods items such as furniture, fridges, or other household appliances in a timely manner, which prevented that demand from being realised. In contrast, the domestic demand component of the consumption of nondurables spiked in March 2020, when consumers stocked up on essentials such as food and cleaning products, and declined only modestly mid-year.

The recovery of durables consumption to 190% of its pre-pandemic level in early 2021 was mainly driven by domestic demand, reinforced not only by reduced frictions in container shipping markets, but also by higher foreign demand for durables produced in the US. The recovery of nondurables consumption to 184% of its pre-pandemic level, in contrast, was driven almost entirely by domestic demand.

The recovery of US manufacturing output

Compared to real personal consumption, the recovery in detrended US manufacturing output to 87% of its pre-pandemic level has been somewhat slower. As in the case of personal consumption, this recovery obscures that the domestic demand component of manufacturing output only had recovered to 57% by March 2021. The difference is accounted for by favourable foreign demand and container market shocks. This evidence underscores that the growth in trade volumes may be faster than changes in economic activity, adding to recent evidence that trade growth need not be proportionate to overall economic growth (e.g. IRC Trade Task Force 2016). 

Concluding remarks

Our analysis highlights the close links between container trade and domestic economic activity in a globalised economy. A simple model allows us to incorporate frictions in container shipping markets into macroeconomic analysis. The model suggests that the recovery of domestic demand in the US, as of March 2021, had been slower than the raw data for personal consumption expenditures and manufacturing output may seem to suggest. In part, this weakness reflects continued low demand for consumer services, driven by Covid-19 related restrictions. As these restrictions ease, one would expect the recovery of domestic demand to accelerate.

Authors’ note: The views expressed in this column are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

References

Altomonte, C, L Bonacorsi and I Colantone (2019), “Trade and growth in the age of global value chains”, VoxEU.org, 28 January.

Cernat, L (2014), “Towards ‘trade policy analysis 2.0’: From national comparative advantage to firm-level trade data”, VoxEU.org, 8 December. 

Congressional Budget Office (2006), The Economic Costs of Disruptions in Container Shipping, Report to the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, United States Senate.

Cosar, K and B Demir (2017), “Containers and globalisation: Estimating the cost structure of maritime shipping”, VoxEU.org, 13 June.

IRC Trade Task Force (2016), “Understanding the Weakness in Global Trade: What is the New Normal?”, Occasional Paper Series No. 178, European Central Bank.

Kilian, L, N Nomikos and X Zhou (2021), “Container Trade and the U.S. Recovery”, CEPR Discussion Paper 16277.

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Topics:  Covid-19 International trade

Tags:  supply chain, container trade, COVID-19, business cycle, globalisation

Senior Economic Policy Adviser at the Federal Reserve Bank of Dallas and Research Fellow at CEPR.

Professor of Finance, Bayes Business School, City, University of London

Federal Reserve Bank of Dallas

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