With inventories in equilibrium, and consumer spending gradually expanding again, freight volumes are starting to see moderate recovery. The efforts by retailers and wholesalers alike to bring inventories in line with sales are now generating some improvement in freight volumes as sales improve, necessitating the need to increase inventories.
Conditions within the supply chain are much improved and consumer spending has begun to recover. Commercial Motor Vehicle Consulting, however, predicts a moderate freight recovery because households and businesses are still in the process of strengthening their balance sheets, which is a drag on spending. The growth rate of freight volumes is determined by the strength of the pull on the supply chain, consumer and business spending.
From the second quarter of 2007 to the third quarter of 2009, household wealth decreased $10.9 trillion, or 20.8%. The massive decrease (Chart A) implies the current shift to increasing savings (Chart B) and reducing debt (Chart C) will not be reversed in the near term. Sluggish growth in personal income combined with a shift in income to increased savings and debt reduction implies slow growth in consumer spending.
Consumer spending makes up roughly two-thirds of final sales, so consumption is the largest determinant upon the growth rate of freight volumes.
The recovery in business investment spending will be sluggish as well due to excess business capacity and businesses increasing cash reserves and lowering debt levels to strengthen their balance sheets. Tight credit availability is a drag on investment spending as well, since it increases the importance of cash flow, thereby putting downward pressure on capital expenditures. The recovery in freight volumes from business investment spending will be sluggish in the quarters ahead.
Strong growth in Asia and Brazil and the depreciation of the U.S. dollar has increased U.S. producers' competitiveness. As a result, exports will cause freight volumes within the manufacturing segment of the supply chain to expand at slightly faster growth rates than consumer and business spending. Exports, directly and indirectly, account for roughly 25% of industrial production, so moderate recovery in this segment will cause freight volumes in this segment to increase at slightly faster growth rates than freight volumes through the wholesale and retail segments of the supply chain.
In short, slow improvement in the freight environment implies that carrier survival depends on proactively managing operations. Truck utilization may require a number of approaches such as diversifying the customer base, increasing penetration in operating regions or reducing overall fleet size.
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.