The Bureau of Economic Analysis (BEA) announced the U.S. economy expanded by 5.7% in the fourth quarter, which was the strongest growth rate since the third quarter of 2003. But do not read this as a sign that a strong freight recovery is imminent. A deep dive into BEA's fourth-quarter gross domestic product (GDP) report implies the freight outlook remains unchanged — a moderate recovery.
The basis for freight growth, final sales to domestic purchasers (Chart A), consumer, business and government spending, expanded by 1.7% in the fourth quarter following growth of 2.3% in the third quarter.
Wholesalers and retailers can no longer satisfy sales by liquidating inventories, so orders for manufactured goods (Chart B) are increasingly causing producers to boost output. During the first half of this year, output will expand at higher growth rates than domestic sales dictate as wholesalers and retailers replenish inventories while satisfying moderate sales growth. For output to sustain those rates, though, the growth rate of domestic sales must accelerate. In the short term, household and business balance sheets cannot sustain strong growth in spending, so the growth rate will moderate once inventories are replenished (Chart C).
Export-related freight volumes will sustain relatively strong growth rates as the global economy moderately accelerates during the recovery. The recession in the European Union (EU) has bottomed out and the region is in the initial stages of a recovery that will slowly stimulate the global economy as the 27 member nations that make up the EU represent about 22% of global purchasing power. U.S. exports increased at seasonally adjusted annual growth rates of 17.8% and 18.1% in the third and fourth quarters of 2009. While growth rates of 18% are not sustainable, export-related freight volumes will increase at faster rates than domestic volumes.
In conclusion, freight growth will receive a temporary stimulus as wholesalers and retailers replenish depleted inventories during the first half of this year, but sustainable strong freight growth requires strong growth in consumer and business spending.
A moderate freight recovery will help fleets increase truck utilization and slowly increase carrier pricing power as the imbalance between freight volumes and available trucks slowly decreases. That implies carriers should remain focused on executing their midrange plans of reducing expenses, boosting truck utilization and/or diversifying customer base, and identifying value-added services that can be profitably provided to shippers. In the near term, a moderate freight recovery implies the pressure remains upon carriers to increase profitability.
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.