Consumers Get Thrifty as Manufacturing Accelerates

Aug. 5, 2004
Economic reports released this week spell out '04 will be a very good year for trucking. Although consumer spending is showing signs of leveling, a prospering manufacturing sector is set to carry the trucking industry along with it.

Consumer spending declined as personal income growth leveled in June, the Bureau of Economic Analysis (BEA) said.

Disposable personal income, or consumers’ total income less taxes, increased a modest 0.2% ($21.4 billion) after a 0.5% increase in May. Personal consumption expenditures declined 0.7% ($53.3 billion)— a reversal from the 1.0% increase posted in May.

Analyst Chris Brady, president of Commercial Motor Vehicle Consultants (CMVC), said it’s too early to worry about a sustained slowdown in consumer spending. “I don’t think this is a re-entrenchment in consumer spending,” Brady said, pointing to the 1% increase in spending the month before. “May was so strong it’s probably unsustainable. Additionally, if you look at GDP (gross domestic product), sales were up in the second quarter.”

Consumer Spending Moderates; Capital Expenditures Boom

Consumer spending is likely to increase moderately through the third quarter as long as personal income continues increasing, Brady said. However, retailers should not expect the same spending sprees by consumers that many businesses are now engaged in.

“What’s different in this [economic] recovery is that households continued to spend during the recession,” Brady said, adding that historically low interest rates played a role in this. “During the slow economy, consumers took on more debt in home equity loans to buy big-ticket items such as autos and appliances instead of extending their spending cycle.”

This spending pattern contrasts sharply with business cycles. “Right now business investments are strong. During the recession they cut back on expenditures to remain profitable,” Brady said.

Evidence of this can be seen in the disparity between steady auto sales, which are driven by consumers, and booming Class 8 truck sales driven by businesses. “You don’t see a boom on the auto side because there is no pent-up demand from consumers extending their replacement cycle— that’s the difference,” Brady said

But overall, consumers will continue to spend more over the third quarter, Brady said. “Right now I believe consumer spending will grow, and there will be a sustained increase in personal income because employment is growing,” Brady said.

Manufacturing Still Strong

Retailers are continuing to place hefty orders and build up dwindling inventories, keeping manufacturers— and truckers— busy in June.

According to the Department of Commerce, unfilled orders, or manufacturers’ order backlogs, are getting longer with a 0.6% ($3.2 billion). Transportation equipment posted the largest increase because of heavy spending on defense aircraft.

However, there is mounting evidence that backlogs for Class 8 trucks are growing as well. Freightliner and Volvo had previously announced hiring hundreds of workers to add additional shifts to their manufacturing facilities as OEMs including DaimlerChrysler and Paccar, announced strong heavy-truck sales in the second quarter.

New orders for manufactured goods increased 0.7% ($2.7 billion), driven by defense aircraft and parts.

Shipments increased 0.7% ($2.5 billion), driven mostly by a 3.4% ($800 million) increase in machinery shipments, underscoring the manufacturing sector is investing in new equipment.

In a separate report, the Institute for Supply Management’s (ISM) manufacturing index increased 0.9% to 62% in July, further underscoring that factories are not only surviving, but thriving. ISM reported growth in the sector for the 14th consecutive month.

“The growth of new orders and production accelerated during the month, adding strength to the index. Employment grew at a slower rate, while the inventories index declined,” said Norbert J. Ore, chair of the ISM manufacturing business survey committee and group director said.

The rate of new orders has increased at an index of 4.7 to 64.7, factory output rate has increased by 2.9 to 66.1, manufacturers slowed its rate of hiring as the index declined 2.4 to 57.3, and customers’ low inventories are slimming at an even faster rate with a decrease of 1.5 to 37.5.

Generally, a category with an index above 50 represents growth, while below represents a decrease.

Trucking Outlook Remains Positive

Steadily growing personal income on the consumer side, combined with lean inventories on the retailer side and growing backlogs for manufacturers ensure trucking will continue to prosper.

“Because of their lean inventories, retailers are probably reordering at a higher rate than sales right now,” CMVC’s Brady said. “The trucking industry should be in good shape at least through the rest of the year.”

About the Author

Terrence Nguyen

Sponsored Recommendations

Tackling the Tech Shortage: Lessons in Recruiting Talent and Reducing Turnover

Discover innovative strategies for recruiting and retaining tech talent in the trucking industry at our April 16th webinar, where experts will share insights on competitive pay...

Stop Sweating Temperature Excursions

Advanced chemical indicators give you the peace of mind that comes from reliable insights into your supply chains. Compromised shipments can be identified the moment they arrive...

Stop Sweating Temperature Excursions

Advanced chemical indicators give you the peace of mind that comes from reliable insights into your supply chains. Compromised shipments can be identified the moment they arrive...

How Electric Vehicles Help You Prolong the Life of Your Fleet

Before adopting electric vehicles for commercial/government fleets, prioritize cost inquiries. Maintenance is essential; understand the upkeep of EV fleets. Here’s what you need...

Voice your opinion!

To join the conversation, and become an exclusive member of FleetOwner, create an account today!