As we continue to navigate unprecedented global supply chain challenges, Border States is committed to keeping you updated regarding supply chain impacts, inflationary pressures and other market trends. We are working diligently to provide you with the most current information possible, knowing this information could change at any point.
We continue to see improvement in several aspects of the global supply chain, but the overall system remains fragile. Freight capacity with ocean and trucking carriers continues to stabilize, and freight rates have normalized to near or, in some cases, below pre-pandemic levels. Diesel fuel prices remain at historic highs but have continued to soften over the past four months. The major risk in the transportation sector remains the risk of labor stoppages due to ongoing contract negotiations. Lead times continue to improve across most market segments, and we are seeing continued improvement in order fill rates. Commodity prices remain volatile, but most prices remain well below pandemic highs over the past three years. We continue to see considerable slowing of announced price increases in all market segments as inflation slows, commodities and transportation costs soften and with continued economic headwinds.
While we continue to see notable improvement, several challenges continue. Unemployment and workforce participation remain at or near record lows, and job growth continues even in the face of economic uncertainty. Right now, there are not enough people to fill jobs, including in the manufacturing and distribution sectors. Strong demand growth in some segments, like electric and natural gas utilities, continues to strain the supply chain and product availability in many categories. Some raw material and subcomponent shortages remain major global risks, including semiconductors chips, semiconductor-grade neon, electric grade steel used in transformers and EV products, and black carbon used in cable shielding/jacketing.
We continue to monitor the supply chain impacts from last month’s devasting earthquake in Turkey. While the damage to railways, ports, roadways and manufacturing facilities was significant, we believe the overall impact to our industry will be minimal. Turkey is located between the Black Sea and the Mediterranean Sea and is a critical waterway for ocean container traffic in Eastern Europe. Turkey’s largest exports include iron and steel (sixth largest exporting country by volume), motor vehicles and machined vehicle parts, electrical equipment and refined petroleum. We know some cable manufacturers have capacity in Turkey, but, to our knowledge, the disruption is minimal on these facilities as they were not in the impacted zone.
On March 10, the Silicon Valley Bank, which is a Santa Clara, California-based lender that catered to the tech industry, collapsed after suffering an old-fashioned bank run. While the most direct impact of the collapse is on the technology and start-up community that relied on the bank, there is the potential for further downstream impact with speculation that the collapse could cause the Federal Reserve (the Fed) to ease further interest rate hikes
The Consumer Price Index (CPI) Report was released this week, which showed inflation slowing for the eighth consecutive month, but it remains 6% higher year over year. The Fed meets on Wednesday, March 22, and is expected to raise interest rates again, with an expected increase ranging from 0.25 percentage points to 0.5 percentage points. These actions and anticipation of additional rate hikes in May and June will continue to create economic uncertainty, the potential for slowing demand and further risk of global recession. We anticipate that ongoing rate increases will occur until inflation normalizes in the 2%–3% range, with predictions of the Fed Fund rates reaching 5.25%–5.50% in 2023. These rate decisions will continue to impact demand in many markets we serve, but we continue to hear from several customers, such as utilities and large contractors, that they are not slowing their workplans and have large backlogs that have built up over the past three years.
Lead times continue to improve in several market segments. Average lead times across all market segments we serve remain elevated over 70% higher than levels in April 2020. While lead times over the past month have ticked up from January, the overall trend in most segments suggests improvement compared to the peak at the end of last year. The segment of greatest concern remains the electrical utility segment with average lead times currently 175% higher than pre-pandemic levels. This is driven by continued supply chain challenges, strong infrastructure spending based on government funding, grid hardening and resiliency efforts, and supporting the transition to green energy and electrification.
The good news for the supply chain is that while lead times remain extended, they continue to be less volatile. Lower volatility with lead times allows us to plan our inventory and serve our customers more effectively.
Below are the top categories where we are seeing extended lead times and material availability challenges. We continue to work with suppliers on these issues and on alternate sourcing to mitigate risks where possible. We say this each month, but early planning together as partners is critical. The better visibility to your forecasts and needs, the more we can help you plan your business in 2023 and beyond.
We continue to collaborate with our national carrier partners to understand trends and impacts in the freight markets. We are seeing improvements in capacity and transportation costs for both ocean and over-the-road logistics; however, labor disputes remain the biggest potential risk in the transportation industry. Baring labor stoppages, we believe transportation is a low risk for further supply chain impacts in 2023.
Economic slowing and uncertainty, global energy shortages, the Chinese economy, the Russia-Ukraine war and most recently the collapse of the Silicon Valley Bank have been driving factors in continued volatility across commodities. Although continued volatility is expected, most commodities have softened considerably from pandemic highs.
Labor shortages and rising wages have continued to be one of, if not the most significant contributors to supply chain shortages and inflationary pressure in our industry. The unemployment rate ticked up to 3.6% from 3.4% in February with the U.S. economy adding 311,000 jobs last month, according to the Bureau of Labor Statistics report. While this is a pullback from January’s job report, where 504,000 positions were added, the net jobs added were still significantly higher than predicted, which is likely an indicator that the Fed will continue to raise rates in the March session. Labor participation, which is the number of eligible people participating in the workforce, remained fairly flat at 62.5%. While the leisure and hospitality sector accounts for one-third of the jobs created last month, the construction industry also continued to add jobs, marking 12 months of employment growth as they work through existing backlogs that have grown over the past two years. Manufacturing, transportation and warehousing employment all recorded job losses. Average hourly earnings rose 0.2% last month after gaining 0.3% in January. While most sectors experienced a slowdown last month, wage growth remains above average.
Although we cannot control the global supply chain issues, we will continue to be transparent and straightforward with you about the challenges and work closely with our best customers and vendors to navigate these challenges together. If you have additional questions, please reach out to your Border States Account Manager for more information.
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