A moderation of linehaul freight volumes has occurred and volumes will continue in that same pattern unless consumer and business spending increases. Linehaul freight volumes were strong in the first half of this year due to wholesalers and retailers replenishing depleted inventories, but have since decelerated as inventory-to-sales ratios (Chart A) have come into equilibrium with sales. As a result, increases will occur only as consumer and business spending causes wholesalers and retailers to restock shelves due to increased sales.
Consumer spending will continue to expand at sluggish growth rates for an extended period of time as households continue to direct a portion of income to both debt reduction and increased savings. They are trying to recover from a decline in household wealth (Chart B) due to lower housing and stock prices.
Expectations of sluggish consumer spending will have large repercussions on the seasonal increase in freight volumes during the holiday sales period. In a soft sales environment, retailers do not want to over-estimate consumer spending during the holiday season, since this would result in excess inventories. Retailers would then be forced to deeply discount merchandise to clear excess stock, resulting in reduced profits.
Due to the inherent risks retailers face in a soft sales environment, Commercial Motor Vehicle Consulting (CMVC) predicts the seasonal increase in freight volumes will be below normal, since retailers will be conservative in building inventories for the holiday season. By keeping tight control over inventories, retailers can reduce the risk of overstocking.
Holiday orders for goods were placed months ago, so if holiday season sales are above retailers' expectations then it is too late to build inventories. If that's the case, retailers will pay premium transportation freight rates to expedite the transport of goods from wholesalers and manufacturers to distribution centers and retail outlets, since retailers do not want to miss the opportunity to sell goods at full or near full price. This scenario would not be considered a normal seasonal increase in freight volumes since goods are not moving into inventory for the anticipated holiday sales season, rather they are moving to immediately satisfy sales. This scenario would result in a later-than-normal increase in freight volumes.
This prediction of softer freight volumes does not signal a “double-dip” recession, but is more reflective of the current economic environment and sluggish consumer spending. CMVC predicts consumer spending will be sluggish for an extended period of time due to the steep decrease in household wealth. In the second quarter of 2010, household wealth was 23.8% below its peak during the second quarter of 2007. Such a huge decrease in wealth results in large and prolonged adjustments in spending as households direct income to strengthen their balance sheets by reducing liabilities (debt) and increasing assets (savings).
Commercial Motor Vehicle Consulting publishes the monthly newsletter “Visibility of the Supply Chain” for general freight carriers. To order a copy, contact Chris Brady of CMVC at [email protected] or 516-869-5954.
