Widespread inventory “de-stocking” softens US freight markets
This destocking “does not bode well” for freight volume growth, David G. Ross, managing director of the transportation and logistics research group at Stifel, said in an Aug. 24 note to investors. “We believe we are going through a de-stock (or right-sizing of inventories) presently,” Ross said. “It appears to have begun in the second quarter and we expect it to continue through the third quarter.”
The buildup of inventories raised red flags for Bob Costello, chief economist at American Trucking Associations. “I remain concerned in the near term, about the high level of inventories throughout the supply chain,” Costello said. “This could have a negative impact on truck freight volumes over the next few months.” Even so, total truck tonnage rose 2.8 percent in July, following an 0.4 percent drop in June, buoyed by better retail sales, factory output and housing starts, Costello said in an August 18 statement.
The inventory correction could lower shipper freight spending in August and soften the market for motor carriers and intermodal rail operators, at least until the peak inland shipping season gains speed. “Since September makes up the bulk of third-quarter volume and earnings, we will resist cutting estimates until we see and hear how next month is tracking,” Ross said. Much depends on whether consumers begin spending more of the savings they’ve enjoyed from lower fuel prices this year, money they’ve mostly been banking.
Balancing inventory in an uncertain economic climate is a challenge for retailers and businesses across the board. U.S. business inventories rose 3 percent year-over-year in June to $1.8 trillion, climbing 0.8 percent from May, the largest sequential increase since January 2013, according to data released by the U.S. Census Bureau. The Census data shows U.S. retail sales rose 1 percent year-over-year in June, but inventories were up 4.1 percent. That robust build-up in stocks helped grow U.S. gross domestic product faster than expected in the first and second quarters. The U.S. Commerce Department revised its initial first quarter GDP projection from an 0.7 percent contraction to 0.2 percent growth from the 2014 fourth quarter. The department is likely to revise its initial second-quarter GDP estimate of 2.3 percent growth upward, but the inventory correction could weaken third-quarter GDP.
“The last few years, rising inventory levels were not a big deal, as they kept pace with sales,” Ross said, “but the inventory-to-sales ratio has been climbing for the past year, which has been concerning from a freight point of view, as excess inventories lead to a drop in freight demand when they get worked off.” According to the U.S. Census Bureau, the total U.S. retail inventory-to-sales ratio, including motor vehicles, climbed from 1.42 in June 2014 to 1.46 this June.