In today's wired world, social trends, government investment and regulation, and national and global economies are connected in a web of complex relationships—and they all impact logistics and supply chains, says Walter Kemmsies. As chief economist at the engineering firm Moffatt & Nichol, it's part of his job to understand how those factors affect the way we source, make, move, and consume products worldwide.
Kemmsies directs the firm's market studies, financial analyses, and global trade and economic trend forecasts relative to investment in transportation infrastructure, with a focus on maritime facilities. Since joining Moffatt & Nichol in 2006, he has helped ports and port-related businesses formulate strategic development plans, among other projects. He also serves as an adviser to executives at port authorities, and transportation and manufacturing companies.
The well-traveled economist has earned his global credentials. He's lived in Europe and Latin America and has undertaken work assignments throughout Asia. Prior to joining Moffatt & Nichol, he was the head of European strategy at J.P. Morgan in London, which he joined after leading the global industry strategy team for UBS.
Kemmsies is a frequent speaker at industry conferences and international economic forums, and his research has been published by investment banks, in business periodicals, and in academic journals. He is a member of the National Association for Business Economics, the Council of Supply Chain Management Professionals (CSCMP), and a member of the advisory board of the Center for Advanced Infrastructure and Transportation at Rutgers University.
Kemmsies received his doctorate in economics from Texas A&M University, and his master's and bachelor's degrees in economics from Florida Atlantic University.
In a recent conversation with DC Velocity Group Editorial Director Mitch Mac Donald, he discussed the economic outlook for the United States, its implications for supply chains, and the critical need for a national infrastructure policy.
Q: The U.S. economy is very dependent on retail sales. What is your outlook for U.S. consumer spending, and how will it affect retail supply chains in the years ahead?
A: We have a situation where a very large number of people are turning 65 every year. The first baby boomers turned 65 last year, and the number of people turning 65 will increase every year until about 2025. As people age, they spend increasingly more of their budget on services than they do on goods, so I expect to see slower growth than we've had in the last 30 years.
A lot of these retiring baby boomers were affected by the collapse of Wall Street back in 2008. Their financial wealth is less than it was four years ago. Their homes are worth less, and some are underwater. Many people weren't really on track to be able to retire at age 65 four or five years ago, and after the events on Wall Street, fewer are able to retire. The baby boomers who are retired already have to build their savings. So we can't expect very high growth in retail sales.
I believe that the retail sector became overinvested. There are too many outlets in too many places. ... As a result, I believe that in the retail sector, we are going to see consolidation, where we will have a smaller number of players and a smaller number of locations. Market power will increase and will be in the hands of those companies, but because of the low retail sales growth that we expect over the medium to long term, the emphasis on cost savings will be greater than it has been even in the last four or five years. ... Anybody who supports retailers will have a smaller list of companies to go after. Those companies have to keep their costs down, so it will really be tough on the import side for retail.
Q: There seems to be more manufacturing coming back to the Western Hemiäphere. What are the implications for supply chains that people are overseeing in the United States?
A: There are two main ones. The first is that Mexico is sitting close to the crossroads of the East-West trade. It is a good place for [Asian manufacturers] to send components to be assembled into finished goods that can be sent by rail or truck into the United States, or put on ships in, say, Veracruz or Lázaro Cárdenas and sent to places like Colombia, Brazil, Argentina, Chile, and Peru. In fact, that is what is happening.
Mexico is close to us, so we can send raw materials very cheaply there; use the Mexican labor, which is roughly the same cost as in China but less than U.S. labor; and then have the goods shipped back to the United States. The total contribution of transportation costs to the price of the product is much lower that way.
The second is that, independent of whether [goods and raw materials] move to Mexico or not, the United States has some comparative advantages in things like energy, agriculture, and high-end capital goods. What those things have in common is that they use very little labor and they use a lot of capital. U.S. labor expense is high, and our interest rates are very low. So automation and [highly automated manufacturing processes like 3-D printing] come back to the United States, which is good for a company but is not necessarily good for creating jobs.
Q: Do you see virtue in establishing a cohesive national transportation policy, and how might such a policy support freight and help strengthen our economy overall?
A: The real wealth of the nation is nourished by its infrastructure. It is something that we learned, and then everybody learned from us—but we seem to have forgotten what we knew. Why did we grow so strongly in the '60s up until 10 years ago? We built the interstate system. We put the Internet in place. We built modern ports. We managed the Mississippi waterway.
Since then, we have neglected this kind of thing. Quite frankly, without infrastructure, you can't have an economy. If you have infrastructure that's not very good, then you have an economy but you are poor. That is Brazil. If you have really good infrastructure—first-rate, like Japan does and Korea does—then you become very wealthy. That's what China did 20 years ago. They started building infrastructure. It's the main thing that we should be focusing on, but we are not. Look at the political debates during the November election. Infrastructure was mentioned, but only in passing.
Q: What should we do, then?
A: First, we should identify our comparative advantages. Then you understand the bottlenecks; or not necessarily the bottlenecks, but what a transportation infrastructure that would enhance exports would look like. Instead of giving subsidies to companies, put them all into the infrastructure. Then, anybody who wants to make a good living can use the infrastructure we are providing them. The important thing is to make sure we are not doing this in a way that favors one region of the country over others.
Q: That gets to the need for a more cohesive national infrastructure plan, then?
A: Exactly. If that is what you are doing, then you are creating jobs. The exports that we produce are not necessarily what creates the jobs. It is the entire supply chain. For example, agriculture is a natural source of exports for the United States. There are jobs in bringing in seeds and fertilizer, in water management. There are jobs in bringing the product from the farm. There are jobs in inspecting the quality of the product. The financial sector gets supported by this. You need price-risk management for the future contracts. Agriculture generates a huge number of jobs, and it could generate even more if we emphasize that. And world food prices have shot up a lot, and you can actually hold back world economic growth if households in many parts of the world can't afford a basic diet. So those are cornerstones for a transportation policy.
Q: How do we go about making the development of a national transportation policy a priority among our elected officials?
A: We need a champion, a true champion. In many ways, President Obama has tried to push for something to emerge. There is a mandate for the Department of Commerce, the Department of Transportation, the USDA, and a few other agencies to work together to establish the priorities.
Transportation infrastructure is very tangible. It creates jobs in the near term in construction, and once you put that infrastructure in place, it supports increased exports and therefore, creates jobs in the long run. But I don't see an accurate analysis of that type coming out of places like the Office of Management and Budget. We don't see the Council of Economic Advisers talking about that. Among the academic advisers on the economy, talk of infrastructure doesn't really exist.
We look at our infrastructure, and we take roads for granted and take all our ports for granted. ... The problem is, there is a lack of awareness about how much transportation contributes to employment in this country.
Q: Any closing thoughts?
A: We live in a world where policy has such a huge effect. The economists get clobbered when they get the forecast wrong. But the main reason forecasts often don't pan out has to do with non-market criteria. The market models that are used when there are no external effects like policy tend to forecast very accurately. So policy actions really throw us off when we try to do pure market analysis.
The problem I have in trying to do forecasts is that not only do you have to forecast what the supply side and the demand side are going to do, but also what the policy actions are going to be. Predicting that is like predicting a coin toss.
