Consumer Spending and Influence Changing Business

Article by John Wagner Jr from Wagner Logistics published on July 17th

We live in a nation where two-thirds of economic growth depends on consumer spending, so it is vital to monitor this important aspect of the economy. Let’s start today by looking at a major influencer: U.S. consumer prices.

Consumer prices rose to their highest point in five months in June as the Federal Reserve talked about easing its printing of money and bond purchases. The Labor Department’s seasonally adjusted consumer price index rose 0.5 percent in June, a little higher than expected, driven largely by a spike in the cost in driving your car. Gasoline was up 6.3 percent for the month after being flat in May.

This had to have had a lingering effect in July as consumer confidence fell to a reading of 83.9 from June’s 84.1, according to the Thomson Reuters/University of Michigan consumer sentiment index. As a benchmark to compare, this measure had been at 64.2 at the end of the recession in June 2009, so we can see that higher prices and other factors are keeping consumers wary of spending.

As evidence, just look at June spending trends. The typical U.S. auto is 11 years old so it’s not surprising to see that consumers largely spent their money on gas and cars last month. Retail sales grew by 0.4 percent, showing that shoppers avoided restaurants and other discretionary items to keep their tanks filled and to replace those old cars. Excluding gas and autos, retail sales actually fell 0.1 percent in June.

While there are still warm feelings about rising home prices and records in the stock market, an increase in borrowing costs may be a bit of a shock to consumers. Paychecks are growing very slowly as well.

On a positive note, U.S. shoppers did buy furniture (up 2.4 percent over May) and apparel (up 0.7 percent over May) and overall, retail sales have increased 5.7 percent year over year. Food service establishments saw their sales fall 1.2 percent in June.

The Commerce Department reports  wholesale inventories fell 0.5 percent in May, a significant drop. The counterpoint to this is that sales increased 1.6 percent. Durable goods inventories fell 0.3 percent as well. The wholesale category accounts for one-fourth of all business inventories.

The Institute for Supply Chain Management’s (ISM) index on manufacturing activity showed growth, increasing to 50.9 percent in June after falling below 50 percent in May. There was also positive news from the Census Bureau as new factory orders increased 2.1 percent in May due to increases in orders for transportation equipment.

Also on the positive side of the ledger, we are seeing continuing, but slow, growth in jobs. The U.S. economy created a net 195,000 jobs in June. April and May numbers were revised upward by 70,000 jobs. The private sector created 202,000 jobs as employment increased by 207,000 people in May. It looks like business is moving forward in a positive way, although most of the new jobs are in the lower wage service sector.

The Dog Days Of Summer For Transportation

Reflecting the slower summer business, transportation and trucking employment fell by 5,100 people in June, including a drop of 3,500 in for-hire trucking. ATA reports that driver turnover increased 7 percent to an annualized rate of 97 percent among the larger truckload carriers billing at least $30 million in annual revenue.

I read with interest a recent piece by Jim Tompkins called “Technology: Creating New Roles Daily for Retail and Consumer Products Supply Chains” (July 11, 2013), addressing the continual improvement in technology that helps companies manage their supply chain on an end-to-end basis. Jim says the fast evolution of technology, from Google Glass to smart watches, is driving consumers’ ability to compare pricing for goods and services. In the age of Amazon, consumers’ service expectations have raised the bar for companies, making continual investment in technology essential. Omni-channel distribution and fulfillment capabilities are the expectation, not the exception.

Second Q Numbers Show Trends

Looking at transportation and logistics in the second quarter of this year, we are seeing a few trends emerge in 2013.

Demand for transportation is holding up well and carriers are not rushing out to add capacity, playing the balancing game between demand and capacity to protect their margins. Finding qualified drivers who will protect their CSA scores is an ongoing challenge.

Consolidation in the freight brokerage industry continues as the performance bond deadline approaches this fall. XPO and other publicly funded companies are snapping up good brokerages as quickly as they can.

Regional LTL companies’ investment in technology is paying off, with great improvement in interlining shipments and providing the visibility features needed for tracking and tracing shipments.

All of this may be observed under the latest DOT transportation services index that increased 2.7 percent in May in year-over-year comparison. This is the second-highest level on record, so carriers know the business is out there but are being conservative and focused on yield management. When I say carriers, I am referring to truck, rail, inland waterways and air; all are included in the Department of Transportation’s index.

Watch out if we see GDP growth of over 2 percent, as capacity that is now balanced will tilt in the favor of carriers allowing them to go after significant price increases.

Railroads are enjoying record intermodal volume according to the Association of American Railroads. June numbers indicate the volume for the first six months of the year were a whopping 6,270,438 units handled, a 3.6 percent increase over the same period in 2012. The weekly average was 252,347 containers/trailers. That means there have been 43 consecutive months of growth in this segment.

Also worth noting this week is that tucked away in the House version of the farm bill is a provision requiring the DOT and the Agriculture Department to report on the cost of shipping goods on railroads. The antitrust exemptions for freight rail companies are clearly being looked at by some members of Congress.

Congressmen from smaller rural districts believe that the antitrust exemptions railroads enjoy are increasing the cost of doing business for manufacturers and farmers in their districts. The AAR, of course, sees this as a major threat to their railroad members’ way of doing business.


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