Overstocked inventories was one of many factors blamed for suppressed freight volumes in December.
Truck and rail freight volumes fell 4.9 percent month-over-month and 3.7 percent year-over-year for several reasons, according to the most recent Cass Freight Index. In addition to too much inventory, manufacturing slowed and consumers who saved money via lower fuel costs spent those extra funds on restaurants and bars, rather than the goods lining inventory shelves, the Journal of Commerce (JOC) explained. While this is not the worst drop the Cass index has reported in recent years – December 2013 and 2014 saw shipments fall 6 percent – it does mark two straight quarters of falling volumes. Much of the blame for tumbling volumes lands on those swollen inventories.
“The nation’s bloated inventories are becoming a problem,” Rosalyn Wilson, senior business analyst with Parsons, said according to the JOC.
Consumer spending is not what was expected
Wilson explained that though employment is up and the cost of commodities such as fuel are down, consumers have been conservative when it comes to their money. The supply chain disruption that followed the West Coast labor dispute – a contentious contract discussion that is still affecting shipping almost a year after completion – is keeping freight volume down.
Holding onto inventory is becoming more expensive
Wilson added that shippers need to find a balance between demand for goods and retailer inventories. Businesses surely want to move their goods – with interest rates on the way up, holding onto inventory will grow more expensive.
“Inventory carrying costs rise with interest rates, and the money tied up in inventory that is not moving becomes a liability,” she said, according to the JOC. “And this may get worse, as the Fed has discussed plans to raise rates several times in the coming year.”
Part of the reason inventory remains on shelves, rather than in consumers’ homes, is because online shopping becomes more prevalent with each year. For example, the busy season leading up to the holidays was strong, but did not meet expectations in part due to shopper preference for buying gifts online. The more people turn to the Internet for their purchases, the less likely inventory is to move. At a time when inventory is on the rise, that is not good for retailers. As a result, shippers are less likely to find demand for freight movement – that is, until businesses can start selling their inventories at a faster rate.
Unless businesses can find a way to start moving product, there is a chance that the first quarter of 2016 will resemble the last six months of 2015. It would behoove retailers and shippers alike to start getting product off the shelves.