In spite of headlines about layoffs, lower profits and plunging stock prices, there are very clear signs that the economy is now on the upswing
after nine months of progressively slower growth.
Last fall, inventories built at a 4.1% annual pace, while goods consumption was dropping at a 2.3% annual rate. So freight grew slightly, but only at about one-third of the growth rate in the previous three years.
This winter, goods consumption appears to be rising at a 1.6% annual rate. Inventories rose at a 5% annual rate in January but are likely to be steady in February and March. As a result, freight volume growth surged temporarily in January but has fallen back to last fall’s slow pace in February and March.
The current outlook for goods consumption is bright. The annual rate of growth is expected to rise to 2.7% in the spring and grow to over 5% in the second half of the year. Leading economic indicators such as housing starts, auto sales and interest rates are all pointing to faster growth in spending over the rest of the year.
However, manufacturers, distributors and retailers are now holding about 5% more inventory than they want to have. They will draw down the excess inventory over the spring quarter, ordering fewer goods than they expect to sell. If the drawdown occurs over 10-12 weeks, it will offset the expected increase in spending on goods.
Freight volume would be unchanged in the April/June quarter and then recover to a 5% growth rate in the second half of the year.
The auto manufacturers have already got their inventory in balance with extensive layoffs during the winter. But consumer durable goods and industrial supplies and equipment have the most excess inventories. This is throughout the supply chain from raw materials to distribution. Inventories always pile up later for them than for packaged goods manufacturers. But their reaction was initially slow and timid, so they will be drawing down the excess until well into the summer.