How Shifting Consumer Spending from Services to Goods Impacts Freight

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The summer months historically have been the time for consumers to spend more on vacations, entertainment, and other services. With the COVID-19 pandemic hit, a majority of service-related businesses were forced to shut down (at least temporarily). Consumers were unable to spend as they normally do on services like restaurants, hair care, spas, movie theaters, and the like. For some states, these restrictions were short lived. But in others, the public perception of consuming services in public spaces still hampers their demand.

Typical service-related spending behavior has since shifted to physical goods, which is a sweet spot for the freight transportation industry. Instead of vacations and other services, consumers, who are able, are spending on items for their homes and cooking, rather than eating at restaurants. This provided profound freight demand growth throughout the pandemic for most goods.

Discretionary and Nondiscretionary Goods Demand

Demand for both discretionary and nondiscretionary goods took significantly different paths throughout the course of the pandemic but are currently both experiencing exceptional growth. The chart below highlights consumer spending behavior during the pandemic.

Furthermore, the chart below highlights where consumers spent. Locations such as wholesale clubs and discount stores remained robust throughout the pandemic, while service-related spending like amusement parks and sporting events remain below last year’s levels by double digit percentage points.

As the pandemic shut down businesses and forced consumers to shelter-in-place, consumer spending on nondiscretionary goods specifically, like cleaning supplies, food & beverage products, and toilet paper surged to historic highs. This forced manufacturers and retailers to ship goods at a rapid pace to keep up with demand.

After the initial surge, freight demand for nondiscretionary goods dropped off slightly, but remained above year ago levels. Consumers continued to buy nondiscretionary goods as they consumed more at home and made sure they kept inventory of long shelf-life food products and cleaning supplies to combat COVID-19.

Read about the initial freight impacts instigated by the pandemic, here

On the other side of the coin, discretionary goods and broader durable goods categories experienced significant declines at the beginning of the pandemic as mass layoffs occurred and manufacturing facilities were forced to shut down. Durable goods demand, which tend to be longer lasting and expensive items, dropped as much as 41 percent at the same time nondurable goods spiked 25 percent year-over-year.

As the chart above alludes to, all industries recovered significantly and are experiencing profound year-over-year growth. Consumers reallocated many of their service-oriented dollars to meet their growing demand for durable and nondurable goods. This ultimately triggered manufacturing to come back online and the housing market to remain robust.

The industry with the largest freight demand gains in recent months is retail, mainly due to robust consumer spending on grocery items. Freight demand for retail shipments surpassed 30 percent year-over-year growth throughout August, which outshines the spike at the end of March and into April due to stockpiling.

This could be due to retailers restocking their inventories and attempting to keep up with the e-commerce boom. Despite consumers being unable to physically shop at retail locations, many companies pivoted to provide contactless pickup, and faster shipping times which contributed to Q2’s dramatic uptick I e-commerce usage.

What Can Shippers Expect For Freight Demand This Holiday Season?

The robust consumer demand for goods and the lack of demand for services will likely make for a more uncertain and volatile freight market during the holiday season this year. Peak season in preparation for the holidays is well underway and the market has already seen disruption.

Surging port volumes—especially West Coast imports—have been driving increased freight demand and are expected to continue into October. Loaded container imports at the Ports of Los Angeles and Long Beach have recovered significantly. The two ports combined rose 5.5 and 15.9 percent year-over-year in July and August, respectively. This trend is expected to continue throughout the last week in September, which would then keep upward demand pressure into October.

Imports are predominately fulfilling e-commerce and other retail needs. U.S. retailers are likely building up their inventories to avoid stock-outs during peak season. The inventory-to-sales ratio for U.S. Retailers hit an all-time low in July and was 16 percent blow July 2019 levels. The downturn is mainly due to inventories depleting, while sales for goods remain robust. The stocking of inventories is another reason for strong freight demand throughout the country.

What does a continued shift to physical goods spending mean long term?

Arguably one of the most talked about influencer on long-term freight demand is employment. At the time this was written, there were roughly 12.5 million people unemployed according to continuous unemployment claims. Initial claims have stalled out between 780,000 and 890,000 each week since the beginning of August.

However, there is presently little evidence of a weakened labor market weighing heavily on nondiscretionary goods freight demand. Retail freight demand has been particularly robust since July. Consumer spending has shown a month-to-month slowdown in grocery items since the supplemental unemployment benefits lapsed, but thus far spending has largely remained intact.

Durable goods spending and freight demand for those goods may be impacted by a handful of uncertain factors:

  • The lack of additional stimulus and supplemental benefits if more layoffs occur.
  • Whether the winter months will cause a spike in COVID-19 cases because this time of year is normally conducive for the spread of influenza.
  • Additional lockdowns and the return of more stringent social-distancing measures, which would result in business closures and volatility in transport capacity.

Amid volatility and swinging freight volumes, shippers are tasked with creating transportation networks that ebb and flow with the erratic nature of a pandemic. As we look to traditional sourcing methods, your annual RFP would struggle to remain relevant after eight months of shifting consumer behavior.

For information about how Breakthrough helps its clients navigate fluctuating transportation procurement strategies, you can read about how one client leveraged our data and expertise, or contact us!

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