The New Year brings plenty of optimism and the development of new business plans by carriers. The road ahead is never as certain as plans call for, but the exercise of developing those plans helps carriers better understand their businesses. Basic inputs of business plans are the macroeconomic environment and the freight environment. Both will have a large affect on projected revenues that influence the majority of business activities.
When looking at inventory-to-sales ratios within the supply chain, inventory investment will provide a moderate stimulus to freight growth this year as compared to the strong growth in 2010, since wholesalers and retailers replenished depleted inventories in 2010. The growth rate of orders for manufactured goods moderated during 2010 as wholesalers and retailer rebuilt inventories to normal levels (Chart A). In 2011, wholesalers and retailers will restock goods roughly at the rate of sales.
The largest determinant to business sales in the U.S. economy is consumer spending, as consumption makes up about two-thirds of final sales to domestic purchasers — households, businesses and government agencies. Household savings and debt reduction activities will continue to remain a drag on consumer spending this year. Consumer spending, however, will moderately accelerate as private sector employment gains spur personal income growth. This will allow consumers to moderately increase spending while following through on building savings and debt-reduction plans.
The growth rate of consumer spending will be stimulated by depreciation, as consumers replace worn-out goods, such as clothing and appliances. The rate at which consumers replace worn-out goods will be determined by personal income growth linked to employment gains.
In 2011, business investment spending will expand at a faster growth rate than consumer spending. Business profits have returned to pre-recession levels as a result of cost-cutting, but business capacity utilization remains weak. As a result, investment spending will be primarily stimulated by depreciating equipment and machinery that needs to be replaced. Moderate growth in business sales will stimulate an upward trend in business profits causing business investment spending on equipment and machinery to gain momentum during the year.
Because the global economy is expanding at faster growth rates than the U.S. economy, exports will provide additional stimulus to manufacturing activity. Freight volumes through the manufacturing segment of the supply chain, therefore, will expand at faster growth rates than freight volumes through wholesalers' and retailers' distribution networks.
The pricing environment will continue to shift to carriers this year since capacity (Chart B) in the for-hire industry will remain unchanged. Selectivity implies higher freight rates, since the high availability of freight implies carriers can turn down unprofitable or marginally profitable freight and still maintain high truck utilization.
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.
