Spending habits change

Nov. 1, 2009
The road to recovery faces a sluggish path as household balance sheets and supply chain inventory levels continue to imply a slow upturn in freight volumes in the months ahead. Household wealth has decreased by $12 trillion over the past two years due to lower home prices and a reduction in the value of financial assets such as IRA and 401(k) accounts

The road to recovery faces a sluggish path as household balance sheets and supply chain inventory levels continue to imply a slow upturn in freight volumes in the months ahead.

Household wealth has decreased by $12 trillion over the past two years due to lower home prices and a reduction in the value of financial assets such as IRA and 401(k) accounts. This steep decline combined with a weak labor market has substantially changed Americans' spending habits. Households are shifting income to pay off debt and increase savings, which creates a drag on consumption. In the first eight months of 2009, household savings rates have increased to 4.1% from 2.3% a year earlier (Chart A). In 2007, the savings rate averaged 1.7%.

Outstanding consumer credit (debt excluding mortgages) has been decreasing since the fourth quarter of 2008 and in July alone decreased at an annual rate of 10.4% (Chart B). A strong freight recovery requires a strong rebound in consumer spending, as spending is the biggest driver of the supply chain. Because of the substantial decrease in household wealth, this is not going to be a temporary adjustment in spending habits and therefore a sluggish recovery of consumer spending.

In spite of this, the growth rate for freight volumes will slowly gain momentum through the end of the year. Retailers have brought inventories into equilibrium with sales volumes, so now consumer spending is spurring inventory replenishment, thereby improving freight volumes from wholesalers and manufacturers to retailers.

As consumers extend trade cycles of durable goods, the growth rates of those goods will not grow as quickly as those for nondurable items (Chart C). The government's “cash for clunkers” program temporarily stimulated spending on autos, but auto sales reported a steep decrease following the conclusion of the program. Government programs cannot alter consumer spending changes in response to the steep decrease in household wealth. Consumer spending on nondurable goods will gradually grow since households have limited ability to expand trade cycles on those items for an extended period of time.

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.

About the Author

Chris Brady

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