After Cutting US Growth Due To Snow, Goldman Now Warns West Coast Port Congestion Will “Drag On GDP”

After Cutting US Growth Due To Snow, Goldman Now Warns West Coast Port Congestion Will “Drag On GDP”

Tyler Durden’s pictureSubmitted by Tyler Durden on 02/25/2015 09:09 -0500

Last week, when with much amusement we observed that the first of many Q1 GDP cuts due to snow… in the winter… had taken place just as predicted when Goldman warned snow (in the winter) may lead to a 0.5% drop in GDP, we hinted that with snow down, faltering Q1 GDP will need all the scapegoating help it can get, and that the West Coast port strike will be used next to justify the sequential tumble in GDP from 5% in Q3 to barely above 2%, and falling, in Q1.

To wit:

Because what above-trend growing economy can possibly handle a few extra feet of snow? What really!? Laughter aside, expect another round of GDP cuts by the, how did we put it, “laughable cadre of propaganda sycophants known as tenured and/or Wall Street economists” due to not only snow in the winter, but also the West Coast port strike as predicted here 2 weeks ago, to take place in 2-4 weeks, once the reality of the latest sharp US slowdown filters through their goalseek-o-trons.

We were wrong: it wasn’t 2-4 weeks. It was 4 days, because overnight first Goldman (and soon all the other penguins) released a report titled “The Fallout from West Coast Port Disruptions” and sure enough, Goldman’s conclusion is that “On balance, we think the net impact on Q1 GDP is probably a modest drag, although the estimated effect is highly uncertain at this point in the quarter.”

Full note:

Problems with the West Coast seaports have been building since the fall of last year, due to a combination of capacity constraints and labor disputes. The situation deteriorated significantly in January and February, as an apparent work slowdown on the part of the dockworkers’ union (ILWU) escalated to employers cutting back on hours and ultimately closing 29 ports for four of five days around Presidents’ Day weekend. Although data are not yet available for February, the total number of “twenty-foot equivalent units” (TEUs) processed through the major West Coast ports appears to have fallen by 20% or more during January. (One TEU equals one 20”x8”x8” shipping container.) The disruptions were noticed in different sectors of the economy, as reflected in respondents’ commentary in the January ISM manufacturing survey, for example. Although a tentative deal was reached between the ILWU and the PMA (the organization representing port owners) on Friday, February 20, the damage to port activity in January had already been done, and our transport equity analyst believes that even the six- to eight-week timeline for clearing up the backlog suggested by the Port of Oakland appears to be aggressive.

Exhibit 1. Labor Disputes Result in Major Disruption

By way of background, four of the top 10 largest US ports by value of imports—Los Angeles, Long Beach, Seattle/Tacoma, and Oakland—were affected by the labor dispute (Exhibit 2). These ports are particularly important gateways for Asian goods imports to the US, handling a reported 70% of this trade volume. The most direct impact on US economic data in the coming weeks will probably appear in the January trade report. Because the US runs a net trade deficit with Asia, and because US exports are geared to a larger extent toward services and air-shipped goods rather than seaborne goods, the West Coast port disruptions can be expected to temporarily reduce the trade deficit in January. Indeed, the 11-day ILWU strike in October 2002—which affected the same ports as the most recent labor dispute—seems to have contributed to both a decline in goods exports (-$800mn) and goods imports (-$2.5bn), resulting in a net +$1.7bn temporary “improvement” in the goods trade balance.

Exhibit 2. Los Angeles is Most Important US Port

The case for a narrower trade deficit in January was already strong, in our view, given the suspicious jump in real petroleum imports in December and the continued drop in petroleum import prices through January. Adding in the effect of port disruptions, our preliminary forecast for January is a large $8.6bn improvement in the nominal trade deficit to -$38bn. This estimate accounts for the fact that some activity was likely diverted to other ports. However, any “benefit” from the smaller trade deficit will probably begin to reverse by the end of March, by which point substantial progress should have been made in processing through the backlog of ships waiting to unload at West Coast ports. In addition, higher net exports (a positive for GDP) will probably be met with lower inventory accumulation (a negative for GDP), as consumer end demand remains little changed.

Exhibit 3. Trade Deficit Likely to Narrow in January

Exhibit 4. Following the Flow of Goods

More serious problems occur when the disruptions last for a longer period of time. First, some exports cannot be stored in inventory indefinitely, such as fresh fruits and vegetables. This production may be lost for good if the shutdown persists, and would show up as an inventory write-off. Second, producers may be forced to reduce output due to supply chain disruptions. Our auto equity analysts have already noted that some Japanese companies with production located in the US have cut back on scheduled production in light of supply-chain issues. (However, disruptions are likely to be smaller than after the Fukushima earthquake in 2011, as companies have made more robust contingency plans following that experience.) Third, direct job and income losses among dockworkers could pile up. For example, about 20,000 dockworkers were affected by the recent disputes. Fourth, indirect multiplier effects could adversely affect other areas of the economy.

Many media accounts have cited an estimate that closures of the Ports of Los Angeles and Long Beach could cost the economy $2bn/day, which looks to have come from an industry group study. (We interpret “cost the economy” to mean reduced GDP.) However, a detailed study from the CBO on the economic costs of disruptions in container shipments was highly critical of estimated effects of this size, and put the cost at a much lower $65 – $150mn per day. We gross up this estimate by a factor of 1.7x to account for the larger value of shipments now handled by the Ports of Los Angeles and Long Beach (vs. at the time of the CBO study), and the fact that—although representing the majority of West Coast port traffic—the remaining ports also matter. As a result, we would put the total cost of shutting down seaborne shipping to and from the West Coast ports at $110 to $255mn per day. Assuming that port disruptions in January and February were equivalent to two full weeks of a shutdown, and that dockworkers do not make up for lost time in March, this would imply a manageable GDP growth drag of around two-tenths of a percentage point in Q1.

There is substantial uncertainty around this estimate, and it is highly sensitive to assumptions. For example, under an aggressive set of assumptions about the amount of perishable goods exports that may never be recovered, one could arrive at a two-tenths drag in Q1 through this channel alone. In light of the high degree of uncertainty we leave our Q1 GDP tracking forecast unchanged and will wait for any trade disruption-related effects to show up in the data before incorporating in our tracking estimate.

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In other words, once final Q1 GDP prints well below 2%, the economists army will immediately announce that upon adding back the “priced to perfection” non-GAAP benefits from non-snow and non-west coast strikes, then real GDP was almost if not in line with the 5% blast off rate recorded in Q3 2014 thanks entirely to Obamacare.

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