Slow momentum is building among freight volumes as inventories continue to trend downward towards equilibrium throughout the supply chain. Things are a little better on the retail side as retailers' inventories are now in line with sales (Chart A). Going forward, this implies moderate increases in freight volumes to retailer distribution centers and retail outlets from wholesalers and producers as inventory is replenished.
Modest increases in freight volumes to retailers have been slow to spur freight volumes upstream in the supply chain since wholesalers and producers are partially satisfying sales by liquidating excess inventories. As inventories approach equilibrium, wholesalers will accelerate inventory replenishment and producers will expand output resulting in slow freight growth momentum within the wholesale and manufacturing segments of the supply chain. In the short term, sales will pull commodities through the supply chain from manufacturers to wholesalers, to retailers, to consumers and businesses.
As inventories of wholesalers and producers approach equilibrium, the acceleration in freight volumes will be modest due to the soft pull upon the supply chain from consumer and business spending. High unemployment combined with Americans saving more (Chart B) and paying down debt (Chart C) will create a drag on consumer spending. Business investment saw its fifth consecutive quarterly decrease in the third quarter of 2009, down 4.1%, and fundamentals for growth remain weak. Excess business capacity, sluggish sales growth, weak profits and high debt are contributing to lower spending. In particular, tight credit availability is compelling businesses to increase cash reserves and lower debt more than normal, exerting greater downward pressure on capital expenditures than should be implied by profits, weak business capacity utilization and sluggish sales.
The Federal Reserve's intentions to keep short-term interest rates near zero percent imply the financial system remains fragile, despite projections from the Obama Administration that the system is returning to healthy levels. This will continue to be a drag on economic recovery for the foreseeable future.
Ultimately, freight volumes expand roughly at the rate of consumer and business spending and in the short term, the macroeconomic environment implies a sluggish recovery in consumer and business spending. With freight growth forecast to slowly gain momentum as wholesalers' and producers' inventories approach equilibrium, modest growth in consumer and business spending will create a slow build in freight volumes upstream in the supply chain.
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.
