October Market Update

Capacity issues may be on the road to improvement, but what about demand factors?

Last month, we took a close look at the factors constraining the supply side of the truckload market. And while supply chains continue to experience stress from a shortage of trucks, trailers and shipping containers, orders for each of these equipment types are at all-time highs. Additional capacity is expected to be added throughout next year as orders are fulfilled, helping ease supply-side issues. For perspective, over 450,000 new trucks had been ordered on a rolling twelve-month basis as of September 2021. The replacement level is approximately 225,000 trucks per year.

As capacity starts to become available, we’re paying close attention to factors that will impact demand.

The latest look at demand in the truckload market

One question that remains is whether the American consumer will continue bolstering the economy through unprecedented levels of personal consumption. Between January 2019 and August 2021, spending on durable and non-durable goods increased 26% and 21% respectively. During the same period, spending on services increased 7% (Chart 1).

At the outset of the pandemic, as Americans adhered to social distancing guidelines, the shift away from spending on experiences to spending on goods was expected. As the COVID-19 vaccine became available, many expected that spending on goods would stabilize and we would see a resurgence of the services sector. While spending on services has rebounded to pre-COVID levels, its growth pales in comparison to goods consumption.

It is worth noting that spending on durable goods has slowed. Examples of durable goods include appliances, tools, computers, televisions, cars and home furnishings. As the name implies, durable goods do not require replacement as frequently as non-durable goods. This deceleration seems to indicate that spending within this segment has plateaued. As Chart 1 highlights, spending on durable goods peaked following the issuance of the third economic impact payment in early 2021.

Another stimulus item that has impacted consumer spending is the federal student loan interest and payment moratorium. Most student loan payments have been paused since March 2020. With approximately $1.73 trillion in student debt outstanding, it takes $17.5 billion per month to service this debt. This equates to $400 per borrower. In February 2022, student loan repayments will resume. This action will have a direct impact on the discretionary spending of millions of Americans. It also has the potential to be a noteworthy storyline in the economic landscape of 2022.

As shown in Chart 2, Consumer spending has pushed the inventory-to-sales ratio to historic lows. These ratios can be interpreted as the number of months of inventory that are on hand in relation to the sales for a month. For example, a ratio of 2.5 would indicate that retail stores have enough merchandise on hand to cover two and a half months of sales. As we enter the holiday months, total business inventories are up 7% YOY. But with sales up 15% YOY, it has been challenging for merchants to keep the shelves stocked.

The rush to replenish inventory has put tremendous pressure on the nation’s supply chain. On October 13^th President Biden announced that the Port of Los Angeles agreed to operate around the clock to keep freight flowing. The Port of Long Beach reported a similar action a couple weeks prior. Together, these ports account for approximately 40% of the container traffic that enters the United States.

Chart 3 was provided by the Marine Exchange of Southern California. It highlights the magnitude of this issue. The yellow line shows that on October 21^st there was a record number of container ships at the port of Los Angeles and Long Beach. It has been estimated that the total value of goods stuck in port on this date exceeded $25 billion.

When will inventories recover and supply chain issues ease? This is the question currently being studied and debated across the United States. Last month, Evercore ISI Research conducted a survey to address this question (Chart 4). Over 45% of respondents indicated that it would be the second half of 2022 before inventories normalize.

The recovery will not happen overnight, it will be a gradual transition back to pre-pandemic levels. As moratoriums begin to lift, stimulus infusions begin to wane, and the American consumer satisfies their appetite for new furniture and appliances; we can expect the market to slowly return to normal. The water has not noticeably receded just yet. Take a breath, be patient, and trust that ArcBest will help you navigate through these volatile times.