Fall is upon us and fleets are busy making their 2012 business plans. One of the most important factors during this time is the freight environment since this determines revenues. The freight environment influences truck utilization, which is also an important factor in estimating profits, since business profits are a function of truck utilization and profit margins. It also influences capital expenditures, since truck utilization influences whether fleets have the correct capacity in place to meet freight volumes. The pricing environment is also influenced, as higher utilization implies increased pricing power for carriers.
The current macroeconomic environment implies a sluggish freight environment in 2012. Most of the risk is on the downside as household balance sheets remain weak, which makes consumer spending susceptible to shocks such as rising food and energy prices. This is similar to what occurred this past spring and summer.
The growth rate of freight volumes is largely determined by final sales to domestic purchasers — consumer, business and government spending (Chart A). By far, consumer spending is the largest determinant of freight growth, since consumption makes up nearly 70% of final sales to domestic purchasers. The deceleration in the growth rate of consumer spending shows that household balance sheets remain weak. Consumer spending will increase at slower growth rates than personal income, since households are directing a portion of income to debt reduction and a portion to savings. Household wealth remains nearly 20% below its peak in 2007.
State and local governments, which are also reducing spending to close budget deficits, will be a drag on the freight environment in 2012 as well. Federal government transfer payments to state and local governments are decreasing following the end of the stimulus program, and the recovery in tax revenues following the recession has been moderate due to the sluggish employment gains, resulting in governmental budget deficits.
In 2012, the strongest stimulus to freight growth will remain business investment spending on machinery/equipment and exports. Business balance sheets are strong and businesses need to replace aging equipment/machinery whose lifecycles were extended during the recession. Businesses, though, are not expanding capacity, so even this growth in investment spending will slowly decelerate.
The global economic recovery stimulated a strong rebound in U.S. exports, but the global economy is moderating as China, India and Brazil have shifted their focus to controlling inflation. The growth rate of U.S. exports will moderate from double-digit growth rates.
New-construction activity will remain at depressed levels. Total construction activity, though, will slowly expand as depreciation stimulates maintenance activities.
Wholesalers, retailers and manufacturers have managed to keep inventories in equilibrium with slowing sales growth (Chart B) during the past spring and summer, which is a positive. This implies freight volumes will flow through the supply chain at about the growth rate of final sales to domestic purchasers, which is predicted to expand at sluggish to moderate growth rates.
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.