Freight growth received a temporary stimulus recently as inventory investment swung from liquidation in the third quarter of 2011 to expansion in the fourth quarter. That good news, though, is tempered by a likely deceleration of inventory investment during the first half of this year as depleted stocks have since been replenished and final sales to domestic purchasers (Chart A) continue to expand at sluggish to moderate growth rates.

While inventory investment was strong during the fourth quarter, inventory to sales ratios throughout the supply chain imply that inventories ended 2011 in equilibrium with sales. This bodes well for freight growth during the first half of this year as wholesalers and retailers restock. If inventory investment continued at the pace it did in the fourth quarter ($56 billion), without a growth rate of final sales to domestic purchasers exceeding 3.5%, inventories throughout the supply chain would become excessive. With household balance sheets still recovering, it's doubtful we'll see that kind of growth in 2012.

As inventory investment moderates (Chart B), shipment growth will decelerate. Still, Commercial Motor Vehicle Consulting is predicting that a slight acceleration in the growth rate of final sales will partially offset moderating inventory investment, thereby keeping freight volumes expanding at sluggish to moderate rates depending upon the commodity.

Personal income growth supported by employment gains will stimulate moderate growth in consumer spending as well. Consumer spending can sustain moderate growth as long as monthly employment gains average 135,000 jobs (employment gains averaged 201,000 jobs in November through January). Accelerating employment gains will not translate into strong consumer spending in the near term since households are still in the process of rebuilding wealth and have developed an aversion to debt-financed consumption. Business investment spending will continue to expand at relatively strong growth rates as businesses replace aging equipment and machinery, but the rate of growth is gradually moderating.

Exports have been a strong source of freight growth during the recovery, expanding at 11.3% and 6.8% in 2010 and 2011, but the growth rate of exports will moderate during the first half of this year due to the recession in Europe. About 21% of U.S. exports are related to the European Union, and the recession there will soften demand for U.S. products. Exports will continue to be a stimulus for freight growth, but the growth rate will moderate from the pace over the past two years.

In conclusion, fundamentals are positive within the supply chain as inventories are in equilibrium with sales, but this does not imply strong freight growth in the first half of this year.