Waiting game

Consumers are once again adjusting spending in response to the higher household credit card balances and higher energy prices incurred this past spring. As a result, the growth rate of freight volumes is decelerating due to moderating inventory corrections and export growth. This does not imply an impending recession, though.

Personal income is expanding at sluggish to moderate growth rates and household balance sheets are weak, so price increases are causing adjustments in consumer spending. Wholesalers and retailers are adjusting orders for manufactured goods in response to decelerating sales growth in order to keep inventories in equilibrium with sales. Inventory-to-sales ratios (Chart A) imply wholesalers’ and retailers’ inventories are roughly in equilibrium with sales, so only moderate adjustments are required at this time. Even moderate inventory adjustments will cause the growth rate of manufacturing output to decelerate as producers adjust output.

In addition to the domestic issues, manufacturing output is reacting to moderate export growth as well (Chart B). Barring an unexpected shock to the system, Commercial Motor Vehicle Consulting (CMVC) does not see the global economy sinking into a recession that would cause U.S. exports to decrease. Risks of a shock, however, have increased as the European sovereign debt crisis has expanded to larger economies such as Italy and Spain. This crisis is capable of resulting in a global credit crunch similar to that caused by the collapse of Lehman Brothers. The European financial system is fragile, and the collapse of financial institutions would affect the global financial system.

A global credit crunch would result in deep decreases in global trade, causing the U.S. economy to tumble into a recession as job layoffs in export industries would occur, reducing domestic consumer spending. While the decisions to correct the European sovereign debt crisis and support the fragile financial system are difficult, CMVC believes European leaders will contain the crisis by applying lessons learned following the collapse of Lehman Brothers. This does not imply, though, that a global credit crunch is not possible, especially if leaders miscalculate the effects of their actions.

Despite the uncertainty, a moderate acceleration in freight growth should occur during the end of the summer or beginning of the fall as orders for manufactured goods become more responsive to retail sales, barring an unexpected shock to consumer and/or business spending. Wholesalers and retailers should have inventories in equilibrium with sales by the end of the summer. Once that happens, freight volumes into wholesalers’ and retailers’ distribution centers will roughly grow at the rate of retail sales. In conclusion, the European sovereign debt crisis does not have to result in a global credit crunch. If there are no other shocks, U.S. freight volumes will slowly expand through the fall.

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