Inventories remain full, depressing US freight demand

Inventories remain full, depressing US freight demand

ORLANDO, Florida — Could U.S. freight volumes rise and overall economic growth slow? If that increase in freight volume accompanies significant de-stocking of “bloated” inventories, the answer is yes, an economist said at the 2016 NASSTRAC Shippers Conference here.

Investment in private inventories contributes to the expansion of real GDP, American Trucking Associations Chief Economist Bob Costello said in comments after a presentation to the conference. Cutting those business inventories pushes GDP down.

In 2014, inventory investment added 0.05 percentage points to annual GDP growth of 2.4 percent, Federal Reserve Bank data show. In 2015, that figure leaped to 0.17 points out of 2.4 percent growth. U.S. GDP growth would have been closer to 2.2 percent without the buildup.

GDP growth seems to have evaporated in the first quarter, after the economy expanded only 1.4 percent in the fourth quarter. The Federal Reserve Bank of Atlanta’s latest “GDPNow” estimate of first-quarter economic performance puts GDP growth at 0.6 percent in early 2016.

Fourth-quarter growth was actually 0.4 percentage points greater than the U.S. Bureau of Economic Analysis anticipated in its preliminary estimate, in part because the expected draw-down in private inventories wasn’t as great as economists thought it would be.

For trucking operators, however, a steep cut in inventories wouldn’t be a bad thing. Bloated inventories remain “the overriding thing impacting freight volumes today,” Costello said during his presentation, depressing replenishment demand and transportation revenue.

“Usually, there are three and a half things that drive truck freight: the consumer, factory output, housing starts and then the ‘half thing’ is the inventory cycle,” Costello said. “Sometimes, the inventory cycle has no impact on truck freight volumes. That’s not the case today.”

“Inventories remain bloated, well above historical average,” Lee Klaskow, senior analyst for transportation and logistics at Bloomberg Intelligence, told NASSTRAC shippers. The national average business inventory-to-sales ratio in February was 1.41, up from 1.37 a year ago.

The “optimal” range for the general business inventory ratio may be 1.30 to 1.35, Costello said.

“People would like to see the ratio come down 20 to 30 percent, but it will take time because the demand is not there,” Klaskow told NASSTRAC. “High inventories should be an issue that will be with us for the remainder of the year, if not into 2017, unless we all go shopping real soon.”

Inventories have been rising since the recession, but the inventory-to-sales ratios spiked following 2014, driven higher by stronger consumer demand that year and the West Coast ports labor dispute, which led many shippers to import earlier in the season and build up inventory.

“At the end of 2014, many shippers were telling me we can’t have that happen again,” Costello said. “They said we need to carry a little more inventory, have a little more of a cushion. Now you have too much inventory on hand and everybody says it needs to come down.”

In late 2014, inventory-to-sales ratios that had reached a plateau in the “soft patch” suddenly shot upward, and they’ve been climbing since. Shippers haven’t forgotten how to manage inventory, Costello said; they’re simply keeping more, and having difficulty forecasting demand.

Unusually warm weather last December, for example, cut deeply into demand for winter clothing at a time when stockpiles of coats, hats, gloves and other seasonal items had peaked. Retailers that had “invested” in inventory to avoid out-of-stock moments in stores had too much stock.

The rapid increase in the growth of online shopping also complicates inventory management as it reconfigures not only sales models, but how retailers source, store and ship goods.

Shippers at NASSTRAC and in other interviews have told JOC.com reducing inventories is a priority in 2016, but de-stocking is much harder than stocking. Everything depends on the consumer. Weak consumer demand means stockpiles of goods are likely to be reduced slowly.

If low unemployment and rising wages spur U.S. consumers to open their wallets wider this summer, inventory may fall more rapidly, though that could also reduce the support private inventory investment lends to GDP, cutting into GDP growth. Imports also subtract from GDP.

Greater personal consumption expenditures and fixed residential investment — more consumer spending and more housing starts — could help fill the gap, however, along with government infrastructure spending and, more unlikely, an increase in exports, all of which contribute to GDP.

Costello expects U.S. GDP to increase about 2 percent in 2016, compared with 2.4 percent the past two years. “That’s not good, but it’s not contraction either,” he said. “This is a very mature economy. If you’re sitting around waiting for 3.5 percent growth, don’t hold your breath.”

Contact William B. Cassidy at bill.cassidy@ihs.com and follow him on Twitter: @wbcassidy_joc.