Consumer spending and business investment spending remain on separate paths to recovery. Commercial Motor Vehicle Consulting is predicting that rising food prices and high energy prices will cause the growth rate of consumer spending on non-energy/food products to moderate during the second quarter. At the same time, business investment spending on machinery and equipment will continue to expand at strong growth rates since non-financial business profits after-tax (Chart A) have recovered to pre-recession levels. Profit margins have also recovered.
Extended equipment and machinery lifecycles during the recession combined with tight credit availability left businesses with aging assets. With stronger balance sheets, cash reserves, and less debt, those companies are now starting to upgrade that equipment.
Expanding credit availability will aid the expansion in business investment spending on machinery and equipment. Rising crude/raw materials and intermediate goods prices will slightly dampen profit margins, but not enough in the short term for businesses to alter investment spending plans.
Since business investment spending on equipment and machinery makes up only 8% of final sales to domestic purchasers, the freight stimulus related to this is narrower than consumer spending, which makes up about 68.5%. Final sales to domestic purchasers, consumer, business investment and government spending are the pull upon the supply chain that stimulates freight growth. Strong freight volumes related to business investment spending cannot completely offset the moderating freight volumes related to consumer goods, so the overall growth rate of freight volumes will moderate during the second quarter.
Because household balance sheets (Chart B) remain fragile, and consumers cannot offset rising food and energy prices like businesses can, household wealth will remain below its peak.
Since 20% of household disposable income comes from government transfer payments, such as Social Security payments, unemployment insurance and food transfer payments, consumers cannot sustain the growth rate of spending on non-energy/food items while paying more for food and energy products. The growth rate of consumer spending on non-energy/food items will decelerate during the second quarter.
Retail sales will remain below retailers' expectations in the second quarter, causing inventories to increase slightly. Retailers and wholesalers will bring inventories in equilibrium with sales by drawing down inventories to partially satisfy sales. This implies slower growth in orders for manufactured goods that will cause the growth rate of industrial production to decelerate.
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.