Consumer spending, manufacturing driving freight industry

( Photo: Shutterstock )

As the flagbearer of capitalism and a lynchpin example of consumerism, it is clearly understood where the growth of the U.S. economy lies. It is estimated that consumer-driven spending accounts for nearly 70% of all economic growth in the country. Consumerism along with meticulous investment and export activities coupled with government spending form the crux of the U.S. economic bulwark.

Though the essence of consumer spending has largely remained constant through the decades, the channels and the ways of brand persuasion have changed. Marketing has moved on from being passive advertisements on print, to digitally pandering to the subliminal desires of consumers.

The ever-growing consumer landscape

The market has seen an evident change from being overtly product-centric to being consumer-centric over the years. Product development teams across the world are trying to design products conforming to the exhaustive needs of the consumers of today, who thus have a greater variety to choose from.

This holds true even for consumption as mundane as farm produce. For example, an average American’s meal travels 1,500 miles before it sits on the dining table. Periodic shifts in the availability of certain farm produce is very nearly a non-entity today when compared to a few decades ago. Seasonal fruits are not ‘seasonal’ anymore, with supermarkets crossing international borders to make sure hot moving consumables are always in stock. 

Taking inflation and rising median household incomes of American families in context, we see that an average consumer has a lot more disposable income to spend in this decade compared to the 80s. Though the federal minimum wage continues to stay at $7.25 an hour since 2009, a large chunk of the working populace lives in states which have higher minimums set in place. This is based on the local purchasing power of parity (PPP) index and the general cost-of-living standards.

When consumers purchase, they set in effect a cycle of jobs that affect companies which produce, transport and sell goods and services. Consumer spending directly or indirectly supports more jobs in the country than the combined number of jobs created by every other relevant sector.

After the great recession of 2008, the growth of consumerism was on a brief hiatus. Households opted to save money and cut spending as a response to a weakened confidence in the economy. But the equations have changed now, with consumer-related employment reaching pre-recession levels, the resilience showing on the improving GDP. 

The freight industry shoulders consumerism

Globalization and free trade across borders have empowered people to think outside the country for their needs. And needless to say, the backbone of consumerism is the freight industry – the sector which dictates when, where, and how a raw material or product is being transported.

The ease of transportation in a country dictates its competitiveness in global trade. Of the $1.331 trillion spent on logistics in the US, $836 billion was spent on transportation alone. This amounts to 5.4% of the U.S. GDP. For developing countries, the percentage of transportation against its GDP might be higher, due to lack of competent infrastructure or maintenance. For example, the logistics costs in China are about 21% of its GDP.

To increase consumerism, the U.S. needs to look favorably towards increasing federal minimum wages which will help sustain growth, since statistics show that nearly all of the money earned by the bottom half of the population is spent, rather than saved. The percentage of employment related to personal consumption expenditure will continue to rise, tilting towards the service industry. It is estimated that by 2022, nearly 63% of all jobs in the U.S. economy would be because of consumers, with them spending $12.4 trillion to support more than 94.7 million jobs.

That being said, consumer spending is not the only thing that drives the economy. As calls for an increase in minimum hourly wages hit the roof, it also needs to be remembered that consumption cannot prop the country’s economy single-handedly. Quarterly reports on the U.S. economy have shown that growth depends on business investment as much as it does on robust consumer spending.

Impact of a potential recession on the transportation industry

If consumer economics and their spending characteristics are scrutinized, all might not be well as it looks on the veneer. The U.S. consumer spending is spurred by an economy that thrives on credit, which has slowly led to record debt levels across the country. As of 2017, American consumers have racked up more than $1 trillion in outstanding revolving credit.

This puts the economy in a spot, which could be one major stock market crash away from a major recession. In the likelihood of this happening, the state of the transportation industry needs to be evaluated, especially since statistics show it to be highly linked to consumer spending.

A lot of the impact is speculative, but to understand how the industry could sustain itself in dire times, it would be prudent to look at the situations post the 2008 recession. When the economy plunges, consumer demand goes down with it. And this inevitably hits the freight industry with carriers getting less freight volume to haul.

But then, the immediate impact of such a plunge would be different based on the size of fleets and the financial resources in the firms. Large fleets generally tend to survive a fall since they have a lot of money in reserve, unlike the smaller fleets that run a tight business.

Resurgence of the manufacturing industry

To survive a prolonged state of lesser consumer activity, the industry would have to access different possibilities to survive and more importantly, grow.

And this brings to the spotlight an industry that has long since been the backbone of the U.S. economy – the manufacturing sector. In 2016, manufacturing alone contributed $2.18 trillion to the U.S. GDP and comprised half the total value of U.S. exports.

Manufacturing is an integral part of the economy, not just because of its sizeable contribution but also because every dollar that is spent on it adds $1.48 in business growth across different sectors like transportation, retail, and services. This means that the freight industry stands to benefit from the resurgence of manufacturing.

Though the U.S. manufacturing industry is the largest in the world, it is not devoid of issues that dampen its year-on-year growth. The industry which produced 28% of the world’s goods in 1985 now produces 18.2%, with China close on its heels with 17.6%.

One of the primary reasons for this is ironically the fact that the U.S. enjoys a better standard of living than developing countries like China and India. This leads to U.S. workers requiring higher wages than their peers from the countries mentioned above, driving up production costs.

But production costs are also dependant on fuel prices. Since the revival of the local coal industry and the domestic exploits with fracking, fuel costs have come down and many manufacturing companies have increased operations in the country.

In the future, with the standard of living improving in the emerging markets, it could be expected that the U.S. would regain its foothold as the manufacturing powerhouse of the world as costs in those countries rise.

Though this does not mean that the number of jobs in the sector would increase, it definitely implies that productivity would vastly improve – thus strengthening the transportation industry by a good stretch. With President Trump cutting taxes for U.S. manufacturers and levying higher tariffs for overseas production, this belief is further reinforced. It is quite certain that the transportation industry has little cause to worry as it would not run into a wall even if bullish consumer spending comes down by a margin in the future.

Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.

Show More

Vishnu Rajamanickam, Staff Writer

Vishnu writes editorial commentary on cutting-edge technology within the freight industry, profiles startups, and brings in perspective from industry frontrunners and thought leaders in the freight space. In his spare time, he writes neo-noir poetry, blogs about travel & living, and loves to debate about international politics. He hopes to settle down in a village and grow his own food at some point in time. But for now, he is happy to live with his wife in the middle of a German metropolitan.