W ill rising gas prices affect consumer spending? If so, will higher prices ultimately result in lower freight volumes? Rising energy prices will cause the growth rate of consumer spending to moderate as gasoline and purchases of other energy products capture a larger share of households’ budgets. Since many consumers purchase gasoline and other energy products with a credit card, the adjustment in consumption trails higher prices. As credit card balances increase over time as a result of higher prices, consumers will adjust spending on nonessential items.
Consumption makes up nearly 70% of final sales to domestic purchasers as it pulls commodities through the supply chain from manufacturers to end users. The adjustments to come in consumer spending imply moderating freight growth in the coming months.
While rising gas prices will slow the growth rate of consumer spending, employment gains have accelerated—fueling personal income growth that will partially absorb the higher energy prices. This will support moderate consumer spending growth.
Government transfer payments made up 19.5% of disposable income in the fourth quarter of 2011, up from 16.2% in 2007 (Chart A), implying household balance sheets remain fragile. Since the recession began, households have reduced debt and increased savings to rebuild wealth and they are not likely to reverse that trend, which would be needed to counteract higher energy prices and sustain the growth rate of consumer spending.
Inventories are in equilibrium throughout the supply chain (Chart B), so moderating consumer spending growth in the coming months will not result in a downturn in freight volumes. Still, wholesalers and retailers will adjust inventories in response to moderating sales, implying the growth rate of consumer goods freight volumes will decelerate during the spring and into the summer.
In the coming months, inventories will increase slightly above plan as the growth rate of consumer spending moderates, resulting in a moderate inventory correction that will slow the growth rate of freight volumes of consumer goods. The backlog of unfilled Class 8 truck orders implies fleets are largely satisfying pent-up and normal replacement truck demand instead of aggressively expanding capacity. This implies moderating freight growth during the spring and into the summer will not reduce fleet capacity utilization; rather, fleet capacity utilization will remain relatively stable at high utilization rates.
High fleet capacity utilization is necessary for carriers to have the pricing power to pass along higher diesel fuel prices to shippers. Fuel surcharges do not completely offset high diesel prices. Rising diesel fuel prices will be a drag on carriers’ profits, but Commercial Motor Vehicle Consulting believes carriers will moderately increase basic freight rates to offset higher costs.