A drag on freight

Sept. 1, 2009
With American households still trying to increase savings and pay down debt, the resulting drag on consumer spending will prevent a quick recovery in consumer durable goods freight volumes

With American households still trying to increase savings and pay down debt, the resulting drag on consumer spending will prevent a quick recovery in consumer durable goods freight volumes. While the volumes are stabilizing, lower home and stock prices that have cut into household wealth in the past few years and are showing no signs of improving will continue to curtail consumer spending.

In comparison to nondurable goods, spending on durable goods such as furniture and appliances (Chart A) will be particularly soft since households can extend durable goods replacement cycles.

Freight growth begins with the pull of consumer spending within the supply chain. The rate of growth within the supply chain differs from that of consumer spending due to inventory level changes within the supply chain. Excessive inventories tend to dampen freight growth as retailers, wholesalers and/or producers liquidate inventories, while leaner inventories stimulate freight growth above the rate of consumer spending as inventories are built up to satisfy sales volumes.

Consumer durable goods freight volumes will be soft over the next few quarters due to sluggish consumption and excessive inventories throughout the supply chain (Chart B). The process of getting inventories into equilibrium with sales volumes should be completed by the end of the year.

Because retailers are further along than wholesalers and manufacturers in getting inventories in balance, consumer durable goods freight recovery will occur first at the retail level before gradually spreading upstream to the wholesale and manufacturing levels of the supply chain (Chart C). Retailer inventory replenishment will slowly accelerate, thereby spurring freight volumes into retailer distribution centers as inventories approach equilibrium.

In conclusion, the downturn in consumer durables freight volumes has bottomed out, but freight volumes will remain at the trough of the downturn for the next few quarters due to excessive inventories throughout the supply chain and soft consumer spending on durable goods.

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.

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