Price concerns

The economic environment is not static, but rather constantly changing. Sometimes changes are gradual while others are more rapid. It appears the slowdown in inflation in the U.S. economy has bottomed out as raw material and basic commodity prices, including food, are increasing. It is difficult to predict if rising prices will result in broad-based price increases that would surely change the economic environment, particularly in the form of higher interest rates.

In the near term, Commercial Motor Vehicle Consulting (CMVC) predicts high energy and food prices will capture a larger share of household budgets resulting in a moderation of the growth rate on consumer spending for non-energy and food products. Since households have been trying to reduce debt in response to decreases in wealth due to the recession, it's unlikely that those same households would incur more debt to sustain current spending levels on non-energy and food products (Chart A).

CMVC does not foresee a downturn in spending on non-energy/food products since moderate employment gains are stimulating personal income growth. Households can continue to increase spending on non-energy/food products, just at a slower rate.

The slowdown in consumer spending on non-energy/food products will cause retail sales to drop below retailers' expectations, causing inventories (Chart B) to become excessive. A moderate correction will result as retailers adjust orders for manufactured goods to bring inventories back in equilibrium with sales. CMVC does not foresee a severe correction since inventories are currently in equilibrium with sales, so inventories can moderately increase without rising to troublesome levels while moderately expanding sales will help retailers keep inventories and sales in balance.

A moderate inventory correction implies the growth rate of freight volumes into retailers' distribution centers will decelerate as retailers' partially satisfy sales by drawing down inventories. This will also result in adjustments by wholesalers and producers upstream in the supply chain.

Since wholesalers and producers are farther away from the point of consumption, and therefore adjust slower to retail changes, this inventory correction will drag into the third quarter.

Unlike previous recoveries when freight volumes expanded at above-average growth rates for sustained periods of time, changes in the economic environment and higher energy and food prices will slow the growth rate of freight volumes in the near term as retailers, wholesalers and producers adjust to slower consumer spending on non-energy/food products.

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.