The Beatles’ influence on rock music is pervasive, as is Bob Dylan’s. What happens, though, when the two collide? At first, the 1970s anthem “Stuck in the Middle with You” sounds like the Beatles. As it plays on, however, its style is attributed to Dylan as it parodies his style. Formed in 1972 in Paisley, Scotland by former school mates Joe Egan and Gerry Rafferty, the rock band Stealers Wheel released its debut album by the same name sending its first single release skyrocketing on the BBC’s Top of the Pops in May 1973. After peaking at No. 8 in the U.K., “Stuck” went on to achieve international acclaim, hitting No. 6 in the U.S. and No. 2 in Canada. As Rafferty, the primary songwriter, recalled, the song’s message is straightforward: “It was just one of those songs, maybe about how life often seems like a series of events, so everything is related to everything else, no matter how remote.”
In the dry science, one industry stubbornly stuck in the middle is Wholesaling. This sector distributes from upstream domestic production to retail and sources products from overseas markets through trade channels for downstream distribution. Demand from this service-related business is not scored in gross domestic product (GDP) because it’s an intermediate, not final sale. Wholesale supply in the form of inventories, however, is incorporated into GDP math.
Because the Law of Supply & Demand hasn’t been repealed, tracking wholesale activity requires prisms into sales and inventories. A critical distinction: Wholesale Trade in the auto sector has outperformed as manufacturers played catch up with output, running down backlogs to replenish dealer stocks. The noise of the UAW strike further muddied the underlying picture in the “middle” industry.
To view the underlying path, we excluded autos and oil from the equation; price movements in the latter also could generate unwanted noise to observe the true picture in wholesaling. What’s left produces clean comparisons of past cycles. As recently as June 2023, the downshift in Wholesale Sales ex-autos and oil reached a -2.8% year-over-year (YoY) drop (light blue line). Historically, declines of this magnitude are recessionary. Pre-pandemic results bear this out in the 2001 and 2007-09 downturns; the low point of the 2015-16 industrial recession also gets a nod.
Trend declines in wholesale supply follow the same in wholesale demand. The current drawdown in wholesale inventories ex-autos and oil did not compare to the industrial recession, however, and only flags the two pre-COVID recessions. It’s also important to note that the supposed stabilization in the YoY trend overstates momentum into the fourth quarter. Wholesale sales ex-autos and oil rose at a 3.2% annualized rate in 2023’s third quarter. Fourth quarter to date was running just 0.3% annualized above the prior quarter. Moreover, the fourth-quarter momentum is entirely due to that of the third quarter. Sales ex-autos and oil fell month-over-month by -0.6% and -0.2% in October and November, respectively, the first back-to-back declines since 2023’s spring.
Demand and supply aside, the wholesale labor cycle has turned. The percentage of states reporting wholesale continuing claims rising on a YoY basis soared above the 90% threshold in the summer before easing back slightly through year-end, an exclusive preserve of recessions (yellow line). Notably, wholesale unemployment bottomed in May 2023 at a 1.3% seasonally adjusted rate (red line), when the state breadth measure first hit 90%. Seven months later, the wholesale jobless rate rose 2.3 percentage points to a 24-month high of 3.6%. Past cycles saw the wholesale rate trough in October 2000, six months after the national rate, and in February 2008, 11 months hence. Pandemic aside, the current cycle saw a one-month lag with wholesale bottoming in May 2023 after the official rate troughed in April.
Since we’re focused on wholesalers, a channel check with logistics managers complements. The broader inventory cycle remains challenged. The Logistics Managers’ Index (LMI) for inventory levels remained below breakeven at 44.3 in December, unchanged from November and the seventh contraction in the last eight months. Moreover, there was more downward pressure upstream (42.3) than downstream (50.0) and less stocking at small firms (42.2) than at their large counterparts (47.9).
Supply-side caution has bled through to lower costs. Inventory costs posted the lowest reading in the history of the LMI (55.8 in December, teal bars). The drop in warehousing capacity (55.1 from 60.6) and rise in warehousing utilization (60.2 from 52.9) corroborate. However, it’s transportation costs that could generate a larger downstream effect on warehouses and inventory management. Per the LMI, “over $105 billion of goods have been diverted away from the Red Sea due to attacks by Houthi Pirates. Between the instability in the Red Sea and the low water levels at the Panama Canal, moving goods from Asia to Europe or the East Coast of the U.S. – or vice-versa – has become difficult.”
P.S. “Difficult” = more expensive. As such, the Drewry composite container costs for 40-foot boxes rose more than $1,000 to $2,669 in January’s first week (purple line). Ripple effects are manifest as Freightos reported weekly gains for China to the U.S. West Coast and U.S. East Coast of $1,138 (to $2,713, orange line) and $1,126 (to $3,964, light green line). The longer the geopolitical shock persists, the greater the chances this pseudo-tax squeezes earnings. Passing the hot potato downstream disincentives restocking and extends the inventory cycle’s drag into 2024’s first quarter.