How The Container Backlog Crisis Affected The US Economy

Over the last several months, the ports of Los Angeles and Long Beach, California, witnessed a surprising spectacle. Dozens of international supersized cargo ships, packed with thousands of containers, lie idle off the coast, waiting for permission to enter the port. They bear the names Maersk, Hapag-Lloyd, or CMA CGM, and billions of dollars worth of America’s imports fill their holds. Most have been waiting for days, but their merchandise will likely sit for a couple more weeks in the United States’ largest port before finally leaving the coast to their final destination. This historical jamming of global supply chains hinders the vital flow of raw materials, industrial inputs, and manufactured goods that fuel the gargantuan machine known as the American economy. What, then, are the economic impacts of the container backlog, and are the consequences likely to last?

Multiple factors caused this congestion of supply chains in the United States. Due to an optimistic COVID outlook in the second quarter of 2021, overall demand for consumer goods rose sharply to reach 122% of pre-pandemic levels. Primarily composed of imported consumer goods, this surge in consumption puts global supply chains to the test. There was a staggering 25% increase in cargo shipped in the first eight months of 2021 compared to the same period in 2019. However, this import increase came as ports and truck driving companies faced constraining labour shortages, resulting in reduced unloading, storing, and moving capabilities. Consequently, containers piled on the docks of L.A. and Long Beach until they reached full capacity. In September, shipping a container through US ports took three times as long as it normally does. Offloading rates dropped by 9%, and the average cost of transporting a shipping container skyrocketed by an annual increase of 195%. To add insult to injury, the Omicron outbreak in late 2022 did nothing but prolong the crisis and hamper recovery efforts. While President Biden announced temporary measures to blunt the effects of the traffic jam, such as opening major ports on a 24/7 schedule, this reaction came too late to prevent consequences for the US economy.

The rising shipping prices and decreasing quantity of goods reaching US retailers caused upward inflationary pressures, with inflation reaching 5.4% in September. This artificially-sustained increase in prices accentuated the consumption slowdown observed after this summer’s frenzy: consumer spending in the US increased just 1.6% during the third quarter, compared to 12% in the second. As consumption represents nearly 70% of the US economy, this slowdown is significant. Indeed, US GDP grew by 2% during the third quarter of 2021 (the slowest growth rate since the April 2020 plunge), mainly due to the reduction in consumer spending. Despite these observations, traditional economic indicators such as GDP did not perfectly capture most of the effects of this container backlog. Indeed, this crisis primarily affected imported goods, which aren’t included in GDP calculations. However, domestic production, the most significant share of GDP, is disturbed by the shortage of foreign inputs required for the conception of certain manufactured goods.

The supply chain crunch has profoundly impacted the US trade deficit. Indeed, the import slowdown caused by the traffic jam and a well-timed increase in the value of US exports caused a considerable decrease in the US trade deficit in October, which fell from US $81.4B to $67.1B. This export increase mainly concerns trade in oil, food and beverage, and automobiles, as local production rises above pre-pandemic levels and international trade stabilizes. However, this trade deficit decrease shouldn’t last: the post-holiday slowdown and the sudden rise of Omicron will push US production back to normal levels in early 2022, while a lack of containers and labour shortages may, in turn, affect America’s exports just as it hindered its imports. More importantly, shipping companies have become increasingly picky about their cargo. As demand for transport services soared, multiple ships have refused to take on low-value American merchandise bound for export, such as timber, seed, and hay, which have narrow profit margins and increased fuel costs due to higher weights. Instead, those ships return thousands of empty containers to Asian ports and stack them with light, high-value manufactured goods to import back to the US. As of December 2021, the port of L.A. exported three times more empty containers than full ones. This trend of turning away American exports in favour of imports will, without a doubt, harm the trade balance and undo the positive changes observed in October.

Furthermore, the shipping crisis has impacted American and multinational companies drastically differently. The greatest beneficiaries of the situation are, as could be expected, the ocean carrier companies. As surging demand increased their leverage, these companies focused their efforts on shipping high-value goods, a move that considerably increased their income. In the first half of 2021, the seven largest shipping companies, including Maersk, COSCO, and Hapag-Lloyd, reported profits of more than US $23B, compared to just $1B the previous year. However, their profits came at the expense of American shippers and retailers, who absorbed most of the financial blow generated by this historic traffic jam. While larger players like Walmart and Amazon had both the capacity to take on higher costs and the position to negotiate more attractive contracts, inflationary pressures and late deliveries decimated smaller American distributors, leaving them with half-empty shelves of overpriced goods.

While the Omicron outbreak should fuel shipping delays well into 2022, the slowdown in consumer spending and reactionary measures taken to reduce supply chain pressures mitigated the gravity of the situation in the last weeks of November. However, even as the flow of containers returns to normal, the US economy will feel the consequences of this crisis. The congestion brought the post-2020 economic surge to an abrupt end, while shipping costs and reduced supply applied a strong upward inflationary pressure that businesses and consumers continue to struggle with. This episode uncovered just how dependent America is on international supply chains and how significant the consequences are when even the slightest defect disturbs this gigantic machine.