INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's analytics, and this is a special bonus podcast of Inside Economics. We're going to be talking about global supply chains with the executive director of the port of Los Angeles, Gene Seroka, and I'm saying that with emphasis because I've gotten this wrong three times and I apologize, Gene. Seroka, what kind of... Can I ask, what is that? Greek? What is that? What is that?

Gene Seroka:                    That's Austrian heritage.

Mark Zandi:                      Oh, Austrian. Oh, I would never have gotten that. Yeah. But welcome. Welcome. And before we officially introduce you, let me introduce my three colleagues. Of course, we've got Chris deRitis. Chris is the deputy chief economist. And Ryan Sweet, who's the director of real Time economics, both the cohost here at inside economics, and we have a special guest Tim Uy. Tim is also a colleague here and covers global supply chains for us. Hi, Tim. Good to have you on board.

Tim Uy:                              Yeah. Thanks for having me.

Mark Zandi:                      Where are you? From where are you talking to us from?

Tim Uy:                              From West Chester.

Mark Zandi:                      Oh, you are. Okay.

Tim Uy:                              Yeah. From the headquarters.

Mark Zandi:                      From the HQ.

Tim Uy:                              That's right.

Mark Zandi:                      A much diminished HQ in the era of the pandemic, but that's good to have you. So Gene, welcome. Thank you for joining us. You've been at the center of the storm here for the last couple of years and I know you've been incredibly busy and keeping the world running, so I really appreciate the fact that you've been willing to join us. How does one become the executive director of the port of LA? How does that happen? What's your history?

Gene Seroka:                    Well, I'm taken kind of a circuitous route, Mark. Good to see you guys. I got out of graduate school in the university of New Orleans during the height of the oil glut. The price, believe it or not, was less than $10 a barrel. In new Orleans, at that time, the economy was built around the energy sector, the banks that helped fund that sector, and of course, the great tourism that we have there in the Crescent City. Couldn't find a job. This was before email and the internet. I wrote letters to just about every fortune 500 company and I kept all the rejection letters. So finally, my dad, who had worked with American airlines for a number of years, said, "You probably want to look at a search firm," found a good company there in new Orleans in the central business district who knew folks at American president lines. A liner shipping terminal and logistics company that, at that time, was headquartered Oakland, California.

                                             I was able to get an interview with APL simply because my dad gave me a free ticket to fly to the interview, and I was told if I did okay on that first talk, they would fly me to see the big boss, but again, only if I could fund my own way. And from there, I got an entry level job and work for APL for about 26 years. That first job entailed getting dry cleaning, washing cars, and doing rate requests. But I did wind up escalating throughout that company's hierarchy. I spent 11 years in Asia in the Middle East, working in locations such as Shanghai, Singapore, Jakarta, and my last posting in Dubai. Then I came back to the United States as president of the America's region for the organization, and it was at that time that I met the mayor of Los Angeles, who was looking for a port director and encouraged me to apply for the job. And now eight years later, we've been working at the Western hemisphere's largest port to try to bring commerce throughout our trade lanes and here in the United States.

Mark Zandi:                      So when the pandemic hit, Gene, two years ago and everything kind of shut down, could you have envisaged? What was about to transpire? Was that even on the radar screen in terms of your thinking that we'd have these very substantive supply chain issues sitting in March, April of 2020?

Gene Seroka:                    No, I couldn't. And sometimes in these jobs, you recall your history and you try to plan for events. Sometimes you're judged on the way you react to those unforeseen problems that come about, but I lived in Shanghai during SARS, and I had a first-hand view of what an airborne pandemic was going to look like at that time. And then early on, I thought this could be 10, 25, 50, maybe even 100 times worse and we all underestimated.

                                             But what we did know enough of was that back in December of 2019, we stopped all international travel. Most of our customers are headquartered in Asia and Europe. So we decided to pull back from that work. Then in February, we stopped all domestic travel save for one bereavement trip, so we kind of had a little bit of a look ahead around safety and security of our workers here at the port of Los Angeles and then began planning a little bit. But in March of 2020, we saw the volume coming through this port drop by nearly half. And if the past was any kind of precursor, from the great recession, it took this port 10 years to recover the volume of business it did in 2008. We thought we were going to be in for a long road.

Mark Zandi:                      Yeah. Pretty amazing the way things transpired. And there's a fair amount of debate, or at least in my mind, there's a fair amount of debate. Maybe it's already been settled. But kind of the congestion in the ports and then the broader global supply chain issues that were evident, what was behind that? Was that was that the surge demand for goods that occurred? Or was that more related to supply side issues like people getting sick and not being able to come to work or other supply side factors that constrained the ability to meet that demand? I'm, I'm guessing is a combination of the two, but in your mind, does one dominate over the other in terms of what, what ultimately caused these bottlenecks to manifest?

Gene Seroka:                    Yeah, there were so many issues involved, Mark, and it really starts about four years ago from today. Looking at the new trade policies that were put in place by the former administration in Washington, getting tough on trading partners by putting tariffs and taxes on imported goods to be met only with retaliatory tariffs, so I'll take it back to 2018 and 19 after those tariffs went into place. By the fourth quarter of 2019, our business dropped by 16%, and that was because we had imported as many keyboard, and brake pads, and other materials that we could. All our warehouses were full ahead of the next tariff milestone that was to begin on January 1st of 2020. Then, just around lunar new year time in Asia, we saw the direction come down from the central government in Beijing that they would start deploying safer at home orders, shutting down different segments of industry including our all-important manufacturing sector. That created for the first five months of 2020 another 19% drop in volume here at the port of Los Angeles.

                                             So in effect we did not import at normal levels for about eight months, and our exports, although lagging, generally, had really been impacted because of the retaliatory tariffs during that elongated period of policy discussion. So we weren't firing on all cylinders, and then suddenly, in the summertime of 2020, the American consumers buying power reached levels we had never seen before. So we're scratching and scraping to try to get every asset in place from vessels, to containers, and chassis, just to simply keep up with demand. Our inventory sales ratio nationwide went to lowest its lowest level in a decade, and all of this has just been running at high speed ever since.

                                             So it's a mismatch, it's a choppy supply chain, some self-induced problems and others that were created by the pandemic. While we couldn't go fly on airplanes to see grandma, go to ball games, or go to movies, we began buying, and it was almost like a family outing on the weekends was going to Costco as opposed to doing more traditional things together. We began what we saw was curbside pickup and hitting our cell phones to get everything we wanted from traditional internet sellers and others, and it changed the buying patterns so much so that these big box retailers, home improvement stores, even our neighborhood hardware store had to rethink how they were going to market during this time.

Mark Zandi:                      So just to paraphrase, to make sure I have it right, what you're saying is leading up to the pandemic, because of the tariffs, and conflict between the US and China, most specifically that depressed activity through the ports. Imports and exports got depressed. And then all of a sudden the pandemic hits, we get this sheltering in place, people can't travel, they can't go to restaurants, so they start buying stuff that has to run through the ports. So you go literally from operating at a very kind of depressed pace to full out max strongest you've ever had to operate at. And it was that shift that occurred in a very short period of time that really created a lot of the bottlenecks and significant supply chain issues? Is that, is right?

Gene Seroka:                    Yeah. Absolutely right, Mark. And it's all about scale within the supply chain. During the worst depths of COVID 19 in the early days of the shutdowns and stay at home orders, folks put their vessels into mothballs. They took ships out of deployment. Everybody scaled down. Railroads furloughed employees. Everybody was hunkered down for the worst and very few of us saw such a quick bounce back economically due to the retail buying power of us as consumers.

Mark Zandi:                      Let's assume that there had been no tariffs, there had been no conflict between US and China and you were kind of operating typically, do you think given the surge and demand that occurred for goods, you still would've seen significant supply chain issues or was it largely related to the fact that you had to come from such a low level of activity to higher level of activity?

Gene Seroka:                    Yeah. I still believe that we would've seen a lot of stress in the supply chain globally, as we ultimately did, but coming from those low of lows to this peak of peaks seemingly in about a two to three month time period; that was too much for any of us to handle.

Mark Zandi:                      Yeah. Got it. Got it. Okay. Let's bring this forward, now. That's a good history lesson to kind of give a sense of things. And here we are today. Where do we stand, from your perspective, on the port, the congestion, the supply chain issues, where are we relative to those darkest days back in kind of the fall of 2020 going into 2021?

Gene Seroka:                    You guys are in Philly, I'm sure some of you follow sports. I'd say for that perspective, we're in the bottom of the fifth, right now. Middle part of the game, home team is coming up. You've still got ways to go, so we've got a number of bats left. We've improved a lot from the barrage in the beginning. Imagine your pitcher going out there and giving up three long balls in the top of the first. It's kind of what we looked like. But it settled into a bit of a groove where data has helped us tremendously. I'd like to say our supply chain participants are a lot smarter because of the data mining that we've been able to do, and our role has tried to really fit into a point where we're seeing around corners, seeing over hills before things become problems, and again, with some of this work that's been taking place, the federal state and local governments acting as conveners to bring private sector partners together, we've got a lot of work ahead of us, but the improvements have been tremendous to date.

Mark Zandi:                      Okay. So bottom of the fifth. That feels like we're headed in the right direction here is what you're saying.

Gene Seroka:                    Yeah, that's right.

Mark Zandi:                      We made a lot of progress. Okay.

Tim Uy:                              Well it depends who's playing, right?

Mark Zandi:                      If it's the Phillies, I don't know.

Gene Seroka:                    How does your bull head look? Are you playing a day game after a night game? You could throw every sports analogy in there that you wanted to, but not bad. We've seen the worst of the worst. We're kind of settling into a groove, now, where we've got a better line of sight than ever and we know the path ahead of us to execute and improve. This supply chain is akin to acting or artistry work. You're always trying to hone your craft. You're never going to have a perfect supply chain. There's something that happens every day globally or right here at home that impacts the flow of goods from manufacturer to consumer, and our job is to see this a little bit better, see issues before they become problems, and try to smooth this out so we don't have the wild swings that we witnessed over the past several years.

Mark Zandi:                      Do you have a statistic or two that you follow or track to kind of give you a sense of why we're in the bottom of the fifth, for example? I was reading, and I probably have the statistics wrong, but there's 30, 35 ships that are sitting out there that are unloaded currently or something to that in that ballpark. And that's down from a peak of, well over a hundred, at the worst of it. Is that a reasonably good statistic to look at to gauge kind of the health of the system and how things are going?

Gene Seroka:                    Yeah, it is. I think to break it down, really, Mark, it's how much product is on the way? And once it's here, how fast does it move? And then we have a dashboard of nine KPIs that I look at every morning before starting my day that gives me that health of the port right off the bat. And so as we say, on the ships that are ready to come in but not quite here yet, you've got about 31 vessels that are sitting out there right now and they're queuing up. They're not waiting as long as they have been in the past so they get to this 150 mile marker. Well offshore. So they're not emitting pollutions near our residential communities. They're safer because they're not bunching together in effect staying away from high wind events where these vessels were rocking very closely positioned.

                                             And then thirdly, rethinking the way the private sector prepares all this cargo and the skilled labor that works it once it gets to port. So that's the reason these ships stay off base right now. The other one is looking at how many ships are departing Asia each day each week, and that number remains very solid. Even through the lockdowns for COVID 19 in Shanghai, we've seen the cargo volume continue. The folks in Shanghai and surrounding areas have prioritized this international long lake cargo, and where the port of Shanghai could not handle everything for various reasons, the neighboring port of Ningbo is up 25% since the lockdowns began 10 weeks ago.

                                             So those two pieces are something that we look at every day. And then the velocity of the cargo, as I mentioned. We're now averaging about 200,000 units moving off the port into the interior of the US. That's about the high water mark since we began measuring. So the ability to get the cargo off the ship, onto a truck, is moving out really quickly. Right now we've got a little bit of a backlog with our trains. We've got more cargo coming in than in recent memory designated for train service, and we've got to double down those efforts.

Mark Zandi:                      Hmm. Interesting. That's interesting you said about China. So the lockdowns, of course China has a no COVID policy. They've been grappling with Omicron. They've basically shut down Shanghai and Shenzhen has been disrupted and other parts of China. But despite that, you're saying you haven't observed any weakening in the volumes of exports out of China coming into the United States or coming to the west coast.

Gene Seroka:                    Yeah, that's correct. And while we know there are impacts, our first thoughts, obviously, are for the health and safety of the good people in Shanghai on the ground. There have been impacts on sub-assembly manufacturing, land-based transport, but the resiliency of the supply chain in China, and it's folks like Yong-Jun, who is the CEO of the Yangshan Deep Seaport off of Pudong that have continued to drive this business. The Yangshan Deep Seaport may be operating at about 85, 90% of normal efficiency, but that's a lot better than some of the observers would've thought going into this lockdown. And again, being able to choose as you look at where the manufacturing hubs are outside of Shanghai to the west, as an example, near the old Hongqiao airport out to Suzhou, Hanzhou, and even into Nanjing and Jiangsu province, once you go west, you're almost equidistant between the port of Shanghai and the porta Ningbo, and these savvy logisticians have started to load up more cargo going in Ningbo.

                                             And these folks have been open for business, their cargo capacity is increased, and it was the same thing. You may remember, not that long ago when Ningbo had an outbreak and one of its five terminals had to shut down. Cargo moved over Shanghai. The other four terminals picked up the slack. These folks are continuing to look at optimizing the supply chain even in a time of crisis like this.

Mark Zandi:                      Interesting. Hey Tim, let me bring you into the conversation. Does that surprise you what gene is saying about China?

Tim Uy:                              No, I think it's consistent with what I've read. I think port congestion in China certainly has gone up significantly since March about 30% to 40% by most estimates. But Gene is absolutely right in the sense that Shanghai has kept its port open, as has Ningbo, as has Xiangjiang. I think there's a lot of congestion because there's really difficulty for truck drivers, and as you mentioned, just basically the land fleet in getting the products to the ports for them to ship those goods over to the US, but certainly I think they've done their very best not to close the ports this time around as they did at the beginning of the pandemic. I think for China, I'm curious to know, Gene, sort of what you think. Moving forward, do you see kind of like a longer period of time before they get back to normal or do you think that this is just a blip that will pass in say a month or two?

Gene Seroka:                    Well, I think, unfortunately, Tim, we're going to have to learn to survive through COVID 19 for many, many years to come, and there will be different policies, there'll be different looks at protecting citizenry on the ground, how commerce and international trade needs to move. I don't think we've seen the last of this, yet. The work that's being done now, again, if I go back to the early days of even the second wave in South China, the porta Yiantian international container terminal kept running, and they brought in reinforcement just outside of Shenzen. That's the water port outside of that great economic city of Xiangjiang and Guangdong province. They kept running and the resiliency aspect was being able to bring reinforcement workers in to keep that cargo going. If you couldn't move your cargo at a Yantian at the time, you went to the west of the Pearl River and you started loading up your cargo in Chiwan, or Nonsha, Donguang, et cetera.

                                             So again, it's this multifaceted port approach where if you're stuck, you pivot. You move over to the other port, the other marine container terminal that may not be faced with the same issues at that moment in time. So we're going to have to continue to find ways around this. The resiliency is the key. Being able to scale. And what happens in the worst event where you have that zero COVID policy and you've got to shut down? You can move cargo among ports. You could find different routes on the road, the ring roadways in Shanghai, as an example.

                                             You can't move a factory. And you can't catch up with production as quick as you'd like if your factory has to lay dormant because of the shutdown and hoping to stop the spread of COVID 19 around and among those workers. So we're going to have to keep watching out. This communication is key. I still keep up with folks that I worked with 20 years ago, and that's how I get my intel on the ground; what's happening, what we see, and it's not to minimize the impacts, but it's about how we can best keep world trade moving.

Tim Uy:                              Yeah, no, that's really great. I really appreciate your insights into China, because I've looked into it quite a bit, as well, and you're absolutely right. I think even as Shanghai kind of activity went down they diverted a lot of that activity to Ningbo, to Xiangjiang, right? So to all these other ports that could potentially make up for that slack. I guess, just to play Devil's advocate, I'm totally with you in terms of I think we've done significant... Especially with the port of-

Mark Zandi:                      You could push back, Tim. Gene's got thick skin. Too nice. Push back.

Tim Uy:                              Yeah. So I'm going to play devil's advocate just for a sec, Gene, and kind of try to pick their brain a little bit. I think one of the biggest concerns for a lot of supply chain analysts is the fact that there are a lot of containers that are stuck in China. So I think that would be my first question kind of the implications for that. The domino effects, right, for the rest of the world. Given that there is such a limited supply of containers and similarly vessels, whenever they get stuck because of COVID restrictions, and then secondly, this longstanding issue of... Well, I don't know how longstanding it is.

                                             Maybe you can help inform that, actually, of why there's such a big asymmetry between the cost of moving goods from the US to China. That could be as low as say, on average, like a thousand dollars for a 40 foot container versus moving goods from China to the US, which could be as high as 14 grand. Several times over. And how that potentially could be hurting us export. So just curious to know your thoughts on those two things.

Gene Seroka:                    Yeah. No, those two are really important subjects and we spent a lot of time looking at each. You've seen the satellite pictures in and around the East China Sea outside of Shanghai, right? Whether it's cargo vessels that are meant to be calling it the Yangshan Deep Seaport off of Southeast Pudong, or the downtown river port on the Huangpu river, think of terminal nine area right downtown near the Pearl Tower. Or you go out to [inaudible 00:24:19] Chau at the mouth of the Yellow Sea, which traditionally was their international hub and now is catering a lot towards the inter Asia market. Inters Asia is the biggest container trade in the world, and Northeast Asia is the largest segment of that inter Asia trade. So a lot of these vessels that folks have a pined on sitting outside there in the East China sea are smaller variety ships that are making those runs to North and South Korea to Japan, running for domestic trade or cabotage as we call it in China, trading across those coastal ports in the country, as well as important markets in central and Southeast Asia.

                                             I mentioned that the Shanghai government, the ports have prioritized those long haul trades, whether it be the Trans-Pacific or the Asia Europe trade. I think as factories come online, as the restrictions loosen, and we saw some folks hanging out down at the [inaudible 00:25:19] last night, and just regular citizens like you and me getting out for the first time in a couple months, that was a great sign. There will be a pop in cargo as these factories catch up, as cargo that's been kind of dormant for a little while begins to start to flow, there'll be a little bit of a pop. And at the same time, we're getting ready for landings at the end of this month in June, which will signify the start of our traditional peak season. A little bit earlier than normal. It'll also be combined with other seasonal products like back to school, fast fashion for summertime, as well as fall fashion products.

                                             So you're going to see all of these markets or submarkets converge at one time, including the reopening as it's been termed in Shanghai. The container industry is very interesting because most of the shipping lines will tell us they'd like to see eight container turns a year. And if for some reason they dip below that, that's an impact to their top line and it will have cost implications. If they can get another turn, that's a double digit increase in their revenue at the top line fashion. So the container velocity, much like it is here for us getting cargo through the port, is that for the private sector shipping lines and other going concerns. So we're going to watch this really closely, but again, I see a pretty quick pop as folks get back to work and what we have to remember is not every factory was closed down.

                                             Not every trucking company was prohibited for moving cargo. The barge business coming down, the Yangtze River has been booming because it's been an alternative way to augment that land transportation in China. So there's a lot to take in here, but watching it very closely. To get those containers back in motion is absolutely key because you've only got three main production companies that manufacture those containers. They all happen to be based in China. The impacts of tariffs on steel prices, the retaliatory tariffs, the section 201 and others here in the United States have all impacted the ability to manufacture, procure raw materials, and then sell those particular containers, although we're in much better shape than we were. Now from a price point perspective, it's been all supply and demand. We've got every ship working 5,000 container ships worldwide. Every one of them is deployed right now saved for less than half of 1% that's in a shipyard being fixed so it can get back out there on the ocean.

                                             The other piece to this is that demand has been so strong, folks have had to pick and choose how they're going to route cargo, who they're going to go with, and what cargo is going to be accepted by those shipping lines. That's come under much scrutiny here in the United States by federal, state, local authorities, as to the fairness and treatment of commercial activities. There's going to be more discussion on that as the weeks and months go by. At the same time, we've seen folks really hustle up to get these empty containers back to Asia for the next round of imports. And those prices simply based on [inaudible 00:28:32] and have skyrocketed, as you said. At the same time, the other variable in this equation is the economic factor of the movement of these containers.

                                             On the import side, mostly finished goods going mainly to metropolitan areas where many of us live and the consumer base exists much of American exports emanate from rural America, whether it be manufacturing, agricultural farmlands. So trying to create not only roundtrip, but triangulated economics on those assets of the container, the truck power, the rail, as well as lining up with shipping schedules has been an elusive part of the equation to us for many decades. Finding better ways to fill that space, whether it be the domestic carriage of goods to get to that rural area and then the international flow coming out is also important. It was a period of time in our industry where pricing was done based on commodity, the higher value of your goods in the container, the higher price it would be. Agricultural products were typically of lower dollar value for a container and commanded less price.

                                             Farmers also asked for a lot of lead time and a lot of end time on their containers. So sharpening that approach, not saying that these guys have to do much different, but sharpening the approach on being an attractive customer to the service provider is something that's been in focus now over the past months and couple of years of this supply chain crunch. So there's a lot to the exporter to go into reinventing themselves and showing what we could do to bring this supply chain closer together and make those types of customers more attractive to the service providers, as well.

Mark Zandi:                      That was very informative. Thank you for that. So just to nail down one thing before we move on, I asked if you could pick one indicator to watch to gauge how things are going in the ports and supply chain broadly, what would that be? What would you look at on a consistent basis?

Gene Seroka:                    If I really had to select just one, yeah, it would be how long a container sits at this port before it moves to its next node.

Mark Zandi:                      Okay.

Gene Seroka:                    We call that dwell time in our industry, and when containers come off a ship and they sit for a limited amount of time before they move out on rail or truck, that is our best outcome possible. We saw at the worst parts of the crunch here at the port of Los Angeles where containers were sitting on our docks upwards of 11, 12, and 13 days. We saw where containers, once they left the docks to go to warehouses or storefronts, they were sitting about a similar amount of time, and for a couple of reasons. One, people over ordered. They began ordering just in case, no longer just in time. And the warehouses, here in Southern California, as an example, we boast the largest warehousing complex in the world. More than two billion square feet under roof from the shores of the Pacific out to the desert region of Southern California.

                                             They've been filled to the rafters for some time. So if you bring that next container in, and there's no room on floor or rack space, it has to sit until those folks can de-band that container, and that just takes more time to get back into the system. Same thing on the ground when [inaudible 00:32:06]. Our witching hour back in October ahead of the year-end holidays and all of the folks that were really nervous that we were going to impact retail sales, we saw about 95,000 containers on the ground. We were above 100% capacity of our Marine terminals. If something didn't pop, those ships would just continue to sit out there. But when we brought that dwell time down, cargo started moving out, you saw the end result. Retail holiday sales were up eight and a half percent, and we had the best retail sales year in the history of the country.

Mark Zandi:                      So the dwell time, at the worst of it, was you said 11, 12, 13 days? What is it now, Gene?

Gene Seroka:                    We split it up into three areas. For about two thirds of the cargo that moves out of the port moves by truck that dwell time's now about four days, which is very close to where we were before this surge.

Mark Zandi:                      Fantastic.

Gene Seroka:                    The cargo sitting waiting for rail departure is now about six and a half days. That should be more like two days. And that's where our focus is today. The cargo sitting off the docks at the warehouse's storefronts, that's about eight and a half days, as well. That should be in the neighborhood of three and a half days. So one of those segments is working really well. We got to keep our focus and bring down those dwell times on the other two.

Mark Zandi:                      Thus you're five bottom of the fifth inning kind of analogy.

Gene Seroka:                    Exactly right. There's plenty of work ahead of us. We're going to use all 25 guys on the roster today. I guarantee you.

Mark Zandi:                      Very good. And the other big, we talked about China and no COVID policy that's been kind of ground zero for a lot of the supply chain issues, but what about the Russian invasion of Ukraine? Is that having any kind of ripple effects on the supply chain on, on your business? Do you sense any impact there?

Gene Seroka:                    It is and I'll tell you why, but not in the traditional light. Our business here at the port of Los Angeles, about two tenths of 1% is done with Russia and Ukraine. Of our energy products, it's about 4% overall business at the port of LA in that particular segment. We're watching very closely to see how the supply chains will respond to the need for agriculture products moving throughout the European union and do we have to step up in the United States to help fulfill that gap? Second, same thing. Flow of the energy products and how will those gaps be filled? But thirdly, and more closer to home, it's the cyber threat scape. We have the nation's only cyber security operations center at the port here in the US. It is currently stopping 40 million cyber intrusion attempts per month. And that's double what it was before. COVID 19.

                                             This gave us such a focus that we then developed one of the world's first cyber resilience centers to bring the private sector and other organizations into this FBI driven neighborhood cyber hood watch program. Today, we've been joined by 43 other organizations, including our dock workers, the international longshore warehouse union, in an effort to protect this port to even greater lengths. And you could imagine if someone sees a threat attempt on their business or is unfortunate enough to witness that attempt be successful, they share that information across this port community. Private and public sector alike. We synthesize that data in a partnership that was co-created with IBM to make sure that it is not repeated across to other companies or other sectors. All of this is done under a cloak of anonymity. So we don't hurt anyone's brand or their commercial entries into the market. So that's what we're focused on now, and we'll help with any other area that is necessary, but this is the one that we've got a keen eye on today and into the future.

Mark Zandi:                      Wow. I would never have thought that. So you're saying that the most significant, serious connection between what's going on between Russia and Ukraine and the port is the cyber risk. You're just getting hit hard by cyberattacks.

Gene Seroka:                    Yes. And we've learned a lot from the past eight years-worth of information and data once we stood up that CSOG, or cybersecurity operations center. We know who the nation states are, the bad actors, we have the ability to look at algorithms to see what the chatter looks like on social media, even into the dark web. We know the IP addresses of where these attacks emanate from on a global basis. Not those that are just pointed here to Los Angeles.

Mark Zandi:                      I want to switch gears a little bit, maybe talk a little bit about the policy response to the supply chain issues. Obviously administration went on high alert when it became clear that this was going to be a problem creating shortages and one of the reasons why that we're having high inflation. They kind of stepped into the breach here. Do you have a view on how effective that was? And if you were king for the day, maybe it can be king for the week or month, what kinds of things policy makers could have done, should have done, should do to try to help out here in terms of improving the resilience of our supply chains in our ports?

Gene Seroka:                    This, too, is a complicated discussion, but I will say that we would not be where we're at today if it were not for the assistance of the federal government, state, and local officials. They've been able to shine a light and act as conveners to bring the public and private sector together. That being said, the Biden Harris administration began shortly after inauguration with an executive order on supply chain, including specific commodities that needed additional attention and focus. They formed this supply chain, disruption task force, including the tri shares of agriculture, commerce, and transportation agencies in Washington to work specifically on supply chain disruption. In the summertime, back on July 15th, secretary Pete Buttigeig of the department of transportation held the first of many virtual round tables and shortly thereafter introduced our first ever port envoy, John Pikari, to lead our effort around supply chain, ports, and how we can better strengthen this flow of goods for the American economy.

                                             As we went into the fall, we found, again, going back to our data mining and collaboration, the cargo was sitting for longer periods of time at the port really coming up the works having ships lined up, we had news helicopters flying around the complex counting vessels every night on the evening news. And what we found was, with this latest phenomenon of ordering so much product just to pick up inventory levels or make sure you were first in line at your factory, some of that cargo was not needed in the market at that time. And there was no shame involved. We just simply needed to have the intelligence to make decisions on how to segment that cargo away from the others and speed the cargo to market that needed to get there. 20% of our imports are parts and components for am American manufacturers. We had to get that cargo to the factory floor. The all-important year-end holidays, think of the small family owned business that owns a toy store.

                                             They've got six weeks to make up their entire annual payroll. We had to get that cargo to market and we did, but it was once we started to segment a lot better, folks didn't always share that information, either, for fear of competitive advantage or possibly trying to keep that cargo flowing in a different manner than folks were used to. Nothing sinister, but individual private sector strategies really drove what we saw here.

                                             We've got 200,000 companies that utilize the port of Los Angeles on an annual basis for their imports and exports. 125,000 of those on the import side alone. And not one of those companies as larger than a 5% market share. So it wasn't a case, like we learned in business school, where you can apply an 80/20 rule. Handle that big chunk of business and then go after the folks that need additional care. This was a bell curve that was really flat when it came to the distribution of cargo. So we had to pick and choose and work with many folks to try to understand what the cargo needs were in the marketplace and then work backwards from there to segment.

Mark Zandi:                      Fantastic. So one other issue that seems to be directly in front of us is the negotiations between the international longshore warehouse union and the shipping companies. How big a deal is that? Do you think that's an issue that, as an economist, we should be worried about? Or do you think that's going to come to resolution here reasonably gracefully?

Gene Seroka:                    Yeah, I think it gets resolved gracefully and I don't speak for either side. We are not party to this collective bargaining agreement, but as you guys know, I have very strong and deep relationships with both the Pacific maritime association, the employers group, as well as the international longshore and warehouse union, the dock workers, marine clerks, foreman, and others. These folks have seasoned negotiators on both sides of the table and each understands how important they are to the American economy. These 29 ports covered by both the employers and dock workers on the west coast of the United States account for roughly 9% of our nation's GDP. We've also seen that these folks have worked very closely together throughout the pandemic, making sure that we have health and safety provisions for all of our workforce. We have the ability to get them personal protective equipment, clean and sanitized machines and equipment before handoffs to the next shift and just a basic spirit of working together through some of our most darkest days in transportation.

                                             They were named essential for a reason, and they continued to be American heroes in keeping our economy propped up during these difficult times. So this contract expires on June 30th. The negotiations will go beyond that. That's fairly traditional. Both sides have the DNA that they want to get the most out of this for their membership and they want to make sure they cover all the bases. Second, what you'll see are that the rank and file dock workers go out on the job every day like they've done for many decades, and since the pandemic began, these dock workers have been averaging six days a week at the job site, the employers that have so much cargo coming in they need to handle it for our mutual customer and keep that economy recovering as we try to grapple with inflation, producer prices rising, and the overall angst at the pump and the grocery store.

                                             We've got to clear our way and a lot of this trade is going to go a long way if we smooth the supply chain to helping do our part, to reduce inflationary inputs. So these folks will continue to sit at the table. We keep in close touch with them and we'll make sure that they have every bit of room to work with their experts on the ground to getting a new long-term deal done.

Mark Zandi:                      Great, good. Hey, this is an open ended question. What else should we be worried about? What is it that you know but we don't know that we should be kind of focused on? Is there any potential things we could get tripped up on other than the pandemic revives and so forth and so on? But anything we should be thinking about?

Gene Seroka:                    Right. Well, there are a few things that we're watching very closely and we're trying to have influence on. One is the workforce. We just talked about the dock workers, and it seems across the US, and in our sector, particularly, those who come from organized labor groups are just about at full employment across the board. I know we are here at the Twin Ports in Southern California with our dock workers, marine clerks, and foreman. It's where folks are not organized or underrepresented that we've been struggling. The report came out just this morning. The nation has 11.4 million jobs open and we're not immune in our supply chain sector. We still need to find better ways to attract, recruit, and retain folks in the truck sector, as well as warehousing and the cost of that marginal worker that is the last worker of a team of ten. The numbers have gone up tremendously.

                                             There are jobs posted in the warehousing sector right now for $25 an hour. They were $12 an hour before the pandemic. So that last worker in that group of 10 is commanding that price. It runs through the whole group of 10. So we've got to find a better way to create sustainability in this area. And what I mean by that is when I first started in this industry, if you worked as a box person on the floor of a warehouse, you had the opportunity, one day, to rise up to supervisor, and if you kept going, you could run the whole place as a manager of that warehouse. In the trucking industry, we've got to bring a sense of professionalism back to that business. The state of California has issued more than 640,000 commercial drivers licenses, yet with 9,000 regular callers who do this truck drainage work at the ports, I would say we could use a few more here to help us as we enter into peak season, but these jobs have to be attractive.

                                             We can't have long lines at the ports. We can't have wait times inside the terminals to get that right container that just happens to be on the bottom of a stack or pile. Some of these folks have left the porterage business to go into parcel delivery service. The US post office or other sectors. Being able to finish your job and be home for dinner with your family or work overnight and be back in time to take the kids to school are important parts of a profession. And I think if we keep our eye focused on this, which is why we will be turning dirt here shortly on the nation's first goods movement training center, and that center is meant to cater to all those folks who are in this business that need upskilling or reskilling, to bring that kid who lives near the port to say, "I want to be involved in this somehow," and everybody in between.

                                             It's a momentous time in our field of work because we've never been met with the speed of technology development like we're going to be met in the future. We've got robotics, computer systems, software that is really making an impact on our industry and we cannot leave the worker behind. A mechanic that works on our equipment at marine terminals no longer uses a wrench, they'll be using a computer much like they do now to tune up our cars. So we've got to get folks ready for that next generation of cleaner equipment and the way the business is going to be done in the supply chain. And with that important aspect of warehousing, that two billion square feet, we've got to have the right skills at those facilities every day to push that cargo through to America's economy. Here at the port of Los Angeles, the cargo that traverses our complex reaches each and every one of our nation's 435 congressional districts.

                                             What we do here impacts our nation's economy. The second piece is more present site, and that is what we do with this rail situation. Rail cargo has increased sixfold since February at the request of the union Pacific in Burlington Northern Santa Fe railroads, who said they had additional capacity to handle more cargo. Now that cargo has ballooned so fast that we've gotten an inordinate number of containers on the ground. We've got to get the rail cars, engine power, and cruise back here faster to be able to pick this up as we move into our peak season later this month. So those are the two pieces that we're focused on real keenly right now. The rail is right in front of us today, the workforce is ongoing every day, but we've got to have a plan for the future.

Mark Zandi:                      That's very helpful. A lot of industries have the same kind of problems. Not the rail, but the labor. Trying to find the right folks given the skill sets that are needed. I am respectful of time. I know we're running out of time. I think we have time for one more question. I'm going to just turn it to my colleagues. Chris, Tim, Ryan, is there something that Gene said that you want to flesh out or...

Tim Uy:                              Yeah, if I may, Gene, I just wanted to kind of touch on the point that you mentioned earlier, I think, about coordination across all these different links in the chain, if you will. Right? Whether it be warehousing, the trucking, the rails, the ports, you mentioned the department of transportation kind of working hand in hand with the private sector. They announced in March this freight logistics optimization works kind of a way to essentially speed up supply chain delivery, which is an information sharing initiative between a bunch of different participants, private businesses, warehousing, logistics companies. Do you see that as really kind of resolving what is essentially a data and coordination issue among all these different parties? The port operators, the drainage drivers, the longshoremen, and so forth? And what's the path forward for that moving forward? Because that seems like that's really at the heart of a lot of the supply chain issues that we're seeing today.

Gene Seroka:                    Yeah. I think it only helps, Tim, but it's also in parallel with several other initiatives. This supply chain is not just one lever we can pull to make it better overnight, as we all know. From the standpoint of what the department of transportation is doing, we built the model about six years ago with the first and still only port information sharing system in the United States called the port optimizer. It was co-created with then General Electric Transportation and the Wabtech company, along with the port of Los Angeles. And it's built off a backbone of sharing customs data before vessels leave Asia overlaid with vessel manifest and information from other supply chain providers. The idea here is, if we could see cargo coming our way between 14 and 40 days prior to that ship's arrival, we can get ready with our skilled labor, our land use, and our machinery much better than ever before.

                                             And that's the idea of FLOW. The Freight Logistics Optimization Works initiative. It's about bringing like-minded people together. So far, in our journey on the port optimizer, we've seen folks reluctant to join us. We've seen laggards in technology, we've even seen obstructionists because they don't want to share their data for fear of their competitors seeing it. I think we're a little beyond that. It's mostly generic data and it will have the rights and privileges signed off in data sharing agreements, much like we initiated all those years back. But this is a like-minded group of people from importers and exporters to service providers, even folks that do parcel service, but carry a tremendous amount of international freight that runs through our ports. And in simplified version, what we've tried to share is that could you imagine opening up your phone or your tablet, computer screen, and seeing a heat map much like we do on our drive time apps?

                                             Hey, if my normal path to work is all red, I'm going to take an alternate route. If it's yellow, I know it's going to take me a little bit longer to get to work. And if it's green, I'm getting there no problem at all. That's what we're trying to develop here on the international surface transportation landscape. Conversely, I want to see an opportunity map on the next slide. If I have the ability to run cargo over the port of Seattle versus Los Angeles and it's a quicker path with less friction, if I'm an importer or exporter, I need to see that opportunity so I know how to route my cargo and not get into that traffic jam with no way out.

                                             The data that we've created was meant to do three things. Give visibility to the shipments, there are still darkness spots across this supply chain where folks don't have a lot of good data. Second, it was meant to create exception management opportunities. We know things go wrong every day in the supply chain, but if I could see it early enough, I can make the adjustment and still get my cargo where it needs to go in a reasonable amount of time. And then thirdly are the analytics and those analytics, whether created in a dashboard like, like the one I shared with you earlier, or have your own proprietary analytics so you can better track how you're competing against others and what you need to do better.

                                             Those are the three big pieces we'll take away from FLOW. We'll be much more knowledgeable than we were prior to this initiative. It's going to take scale, though. It's going to take more people joining right now. The initial group is about 18 of us. We've got to get more people on board, but the pilot and the proof of concept is going to be first added to the gate, and when successful, I think we'll see more people knocking on the door to join.

Mark Zandi:                      Well, Gene, I want to thank you for taking the time. I'll have to say, I actually feel better after this conversation. I was a little nervous and fearful what was going on with China, Russian invasion. I was expecting a little kind of a darker conversation, but I like the bottom of the fifth. That feels pretty good to me. Is that right? Is that what you wanted me to feel after the end of this conversation?

Gene Seroka:                    Well, part of my job, Mark, is to give you the ground truth of what's happening and we try to give it in an unvarnished fashion. I am optimistic because I live this business every day. I see what's happening and hopefully that came across here today in this segment.

Mark Zandi:                      Well, great, perfect. You, you accomplished your goal and thank you for all your service, because as you pointed out, everyone in the country is touched by the work that you and your team does, and so thank you for all the work that you've done during this very difficult period. So very much appreciate you coming on Inside Economics. Thank you.

Gene Seroka:                    Thank you, gentlemen. Appreciate the time today. Good to see you.

Mark Zandi:                      Well, listener, I just want to remind you that we will be having our normal podcast on Friday. This is jobs Friday where we're going to be talking about the data for the month of May. The economy feels like it's slowing a little bit, and we've got a bit of a debate going here at Inside Economics about how much it slowed in the month of May, but we'll reprise that in a couple days. So hopefully you enjoyed today's special bonus podcast on supply chains in the port of LA and look forward to the conversation on Friday with regard to the jobs report. So take care, now. Bye-bye.