Railroad strike would be 'devastating for the economy’: Flexport CEO

Flexport Founder and CEO Ryan Petersen joins Yahoo Finance Live to discuss the shift in consumer spending, supply chains, freight volumes, and how a potential rail strike would impact consumers and companies.

Video Transcript

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JULIE HYMAN: Companies are also gearing up for the holiday season and adjusting to current economic conditions. But a new consumption forecast from Flexport predicts that the slump feared in consumer spending may still remain a ways off.

Flexport founder and CEO Ryan Petersen joins us now. Hey, Ryan. It's great to see you. You, of course, know everything logistics. And so talk to us about this survey. And you know, I know that we've talked broadly about consumer spending holding up. But it seems like what people are buying is pretty different.

RYAN PETERSEN: Yeah, so Flexport is a global technology platform for logistics. So we have access to loads of data. We ship about 1% of US containers that are entering the country. A similar percentage of the airfreight entering the country. So we have a pretty good view there. And then we have a small economics team that does all kinds of research in terms of accessing broader data sets and compiling things.

So we've built this consumption forecast originally for our own purposes because it's very hard to know like how many containers are gonna get shipped. And that's important for how many people we're gonna need and what kind of contracts we should sign.

So then we started to realize actually this data is quite valuable for the wider world. And have been publishing it now for quite some time. And we've gotten very good at predicting this data in advance. And it's held up. The accuracy has been quite good.

And we're showing about a 1% increase over last year, in real dollar adjusted terms, in consumption of goods. So this shift back to services, which we all expect and is happening, is a little bit overblown. We're still seeing an increase of-- you know, a moderate increase year-over-year in terms of consumption of goods.

BRAD SMITH: What about where the containers are being shipped into? Where-- what are we seeing on the port front right now? Where earlier this year and I believe over the summer, just a few weeks back even, we were still hearing some concerns about where there could be strikes at some of those key ports. And how have we moved through that in order to kind of remove some of the congestion?

RYAN PETERSEN: Yeah, and we should be clear that consumption forecast is really about retail spending, about what's happening with consumers buying things. Imports of containers are down quite a bit.

The Port of Long Beach reported down 26%, the volume of containers coming into the country. The difference there is really companies ordered too much stuff or rather what happened was they ordered stuff expecting the transit time to take 100 days. And transit times have more or less normalized.

So those goods arrived early and all of a sudden everybody's overstocked and they had to decrease their orders. So it looks like a real recession if you're in the freight industry. Volumes have come way down.

Yes, we're quite concerned-- not so much about port strike right now. We don't have great intel. That negotiation is ongoing between the labor union there. Haven't heard much at all, to be honest, of whether that's gonna turn into a strike or not. But where we're very concerned is in the rail-- on the railroads.

So far, 8 of the 12 railroad unions have approved the new contract. Four of them have rejected it. And they're in a holding period right now until after this runoff election down in Georgia.

So that's sort of December 9 is when the cooling off period ends and we may see a rail strike, which would be really devastating. About 40% of all ocean containers end up moving inland by rail. Most of the grain is shipped by rail. The oil is-- a lot of it is shipped by rail. It would be really devastating for the economy if the railroads stopped working.

BRIAN SOZZI: Ryan, take us through that potential impact for consumers. What would they see? Empty shelves? What might be out of stock in a big way?

RYAN PETERSEN: Yeah, so we-- I've seen estimates from another industry trade association, actually the chemicals industry trade association estimating that it would lead to a 4% increase in inflation. An increase of four percentage points for inflation that's massive. 700,000 jobs would be lost.

I mean, I think-- I don't know how much weight to put in their report because they obviously don't want this. They're shipping oil. They're shipping chemicals. They definitely don't want a rail strike so they want to make sure everybody is as scared as possible about it.

But it would certainly be devastating. We don't have enough trucks to fill in. And so what you'll see is that those containers will pile up at the ports. We'll be back to where we were last year, where there was 100 container ships waiting offshore unable to unload.

All the supply chain problems that we've dealt with the last couple of years will come back really, really quickly if the railroad unions were to go on strike. So not good at all for consumers.

JULIE HYMAN: Ryan, barring a strike, right, we have seen shipping rates come way down. We have seen fuel prices come way down. We have seen input prices for things like grains come down from where they were.

Now, I know you're not an economist. But you see a lot about the flow of goods, right? Why hasn't inflation come down more than it has or the rate of inflation come down more than it has?

RYAN PETERSEN: Yeah, totally. I'm not an economist, but I sometimes play one on TV.

JULIE HYMAN: Yeah. [LAUGHS]

RYAN PETERSEN: You know, inflation is a super-complex beast that I think it's really hard for it. There's so many variables that it almost doesn't lend itself to science because science wants you to be able to isolate a single variable. That's kind of how the scientific method works. And there's just such a complex adaptive system. It's very hard to pin down.

We have seen a major normalization on the freight side. There's no longer huge delays at the port. Transit times that we're taking 120 days are now taking 50 days. The price of ocean freight a year ago was costing as much as $20,000 a container to ship from Asia to the US. It's back to around $2,000 or less. So we've had major increases there.

I think some of these things just take time to flow through to the end consumer, you know? These companies-- the goods that are on the shelves now, they paid the $20,000 bucks to get them in or the $10,000, whatever the price ended up being for that container. And the current-- the goods that are on the way now cost less. So there's some element of time lag for these things.

But there's also-- I mean, the biggest factor-- and this is way outside my realm. But last year, 40% of all homes in the United States were refinanced. People were load-- flushed with cash last year. That's gonna take up time. People aren't refinancing their homes now. It's too expensive at these interest rates.

So that's gonna take a while. Once that cash gets burned through, you're gonna see a lot less spending. It's not a good thing. We want we want more consumer demand and inflation comes down for supply side reasons, that we're more productive, shipping more things, et cetera. But prices will-- seemingly will come down. And that's the point of these rate increases, right? So--

JULIE HYMAN: Yeah.

RYAN PETERSEN: --I think it'll take it just takes some time.

JULIE HYMAN: Ryan, you did a pretty good job there of playing an economist on TV. Let me bring you back around to the thing the most about, logistics. You really got on our radar during the pandemic, right? Watching the jam of ships that we saw off the West Coast in particular and what you were seeing on your network.

And through it all, we talked to you about that the system was sort of dysfunctional, right? And it was put under stress by what was happening. But there were underlying issues. Have any of those issues been fixed?

RYAN PETERSEN: No, not really. I would argue that like largely the problems have been resolved through shipping less containers. And we're back to kind of like a volume that is actually lower--

JULIE HYMAN: Yeah, but what happens-- to your point, what happens if there's a railroad strike? What happens if there's another event that causes that kind of imbalance?

RYAN PETERSEN: Yeah, we're gonna go back to where we were with last year and the year before where you had these like super-long delays. You know, within Flexport, we've made some progress that we're very proud of. I don't know that it's enough to affect the economy as a whole.

But for example, we now have it so that truckers don't need to make an appointment at certain port terminals where we've deployed our tech. Where they can-- the driver, the truck driver can just go-- instead of having an appointment for a specific container, that driver can just-- that truck driver can just go, grab the first container that we give them, and then the mobile app tells them where to take it so there's no more appointments needed.

That was a huge problem last year. Truck drivers were missing 50% of their appointments. And then when they missed the appointment, that container kind of sat there blocking everybody else's container from getting to the front.

So we are making progress but it's sort of like incremental on a micro economy basis rather than something that's gonna solve the broader supply chain problems, which, frankly, is gonna need a lot more robotics, a lot more automation, more infrastructure, a kind of rail that goes straight to the ship instead of stopping. In Oakland, for example, the railroad stops 500 feet from the port. So you have to bring a truck from the port to the rail. It's kind of like, oh, man, can we just extend this railroad by another 500 feet?

So some of this stuff, it's not really getting done. I haven't seen a lot from the infrastructure bill that's gonna solve this in any kind of time frame that would help us right now.

BRAD SMITH: Ryan Petersen, we know this is like your playoff season right now. Flexport founder and CEO Ryan Petersen, thanks so much for taking the time here with us this morning. Happy Thanksgiving.

RYAN PETERSEN: My pleasure. Happy Thanksgiving, everybody.