Winter spending spree keeps pressure on freight capacity

By James Haughey, Director of Economics, RBI -- Logistics Management, 2/1/2006

January sales at chain stores were 13.3% higher than they were last January, representing the largest year-on-year gain in five years. Furniture stores saw an 8.2% rise on a same-store basis and close to 10% for total sales. “Big box” discounters experienced double-digit sales gains compared to a year earlier, including 10.5% for Wal-Mart, 14.1% for Target, and 12.6% for Costco.

The surges in consumer and business purchases in December and January have exacerbated the current inventory shortfall. Inventory restocking will continue for several more months, leading freight volumes to rise faster than final purchases. The combination of above-trend sales volumes plus restocking, especially at “big box” discounters, means a surge in Asian imports that could possibly lead to another jam-up of West Coast ports and rail lines.

The unexpectedly low 1.1% increase reported for fourth-quarter gross domestic product (GDP) does not mean weaker freight-volume growth ahead. The U.S. Department of Commerce will revise GDP growth substantially upward based on very strong December sales, production, exports, and hiring reports that were not available in time for the first GDP estimate. Freight volumes were largely unaffected by the weak sectors in GDP: auto sales, oil imports, and timing issues in measuring federal government spending. Auto sales and oil imports were back on trend in January; both will contribute to much-stronger GDP growth in the current quarter, perhaps exceeding 5%.

The stronger economy, as always, is having a negative impact on fuel costs. Crude oil costs have returned to the mid-$60 range. This price rise is due far more to supply concerns than to demand, which has declined slightly in recent months. Speculators at hedge funds and oil trading firms are large buyers again, due in part to supply fears that have been heightened by threatened production cuts in Iran, Venezuela, and Bolivia and by more fighting near oil fields in Nigeria and the Middle East. As the next hurricane season approaches, moreover, there are concerns about oil-platform shutdowns again in the Gulf of Mexico. If these feared supply interruptions do not occur, crude oil prices should ease throughout the year, reaching a price that is consistent with the underlying balance of supply and demand, or at most $50 per barrel.