Second-Half Issues: Freight Congestion, Retail Inventories & Consumers

It’s starting to look like the wild, wild west for retailers where uncertainty reigns and anything’s possible in the back half of 2024.

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Lean inventories suggest positive restocking demand for shippers, but slowing consumer spending and fears over incremental tariff increases after the U.S. presidential election could end up hurting retailers’ bottom lines.

Shipping

A report from TD Cowen’s thematic research team on the consumer and the supply chain notes that ocean freight rates have risen due to advanced shipments caused by uncertainty over the U.S. presidential election and potential tariff increases, as well as ongoing maritime shipping disruptions in the Red Sea region. While 12 percent of global trade had passed through the Suez Canal before the start of the Israel-Hamas War, recent figures indicate the number of ships passing through had dropped by 66 percent.

The thematic team said the rise in shipments could impact both rail and trucking rates ahead of the peak shipping season. TD Cowen’s proprietary Rail Survey found that 49 percent of shippers expect shipments to remain in warehouses for less than a month. Another 35 percent expect shipments to sit in warehouses for two months.

Based on proprietary surveys for rail and trucking, carriers’ expectations for business growth have reached levels not seen since the first quarter of 2022, although they are still below the five-year average. Rail shippers anticipate growth of 2.5 percent, while truck carriers expect growth that’s just shy of 2 percent. The Trucking Survey also found that carriers expect a 1.9 percent rate increase in the next six months, and that 67 percent of respondents don’t expect a spot rate recovery until 2025. In addition, 18 percent of rail shippers surveyed reported shifting volumes to the West Coast in the past six months. In contrast, U.S. inbound air freight prices “remain subdued,” but are still above the lows reached this past January.

Retail

Inventory levels remain “very lean,” at up 17 percent at the end of the first calendar quarter of 2024.

That is increase is marginally higher from up 13 percent in the fourth quarter of 2023. The first quarter of 2023 ended at down 4 percent. Inventory levels hit a low of down 38 percent in the second quarter of 2022. Current inventory levels over a three-year period are still far below the high of up 76 percent in the first quarter of 2021.

At current levels, the thematic team is anticipating “potential restocking in the second half” of 2024, which it deemed a positive sign for shippers.

For retailers, it could be a different story. That’s because retailers remain most at risk if there’s a rise in incremental tariffs —both in costs and possible supply chain disruptions—after the November elections .

Another question mark for retailers centers on the pace of consumer spending.

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Bifurcation of consumers

Higher-income consumers present a bigger risk for retailers if more of this cohort decide to trade down.

The typical thinking is that lower-income consumers—many are living paycheck-to-paycheck—are the key reason why retailers have posted earnings misses. While spending has slowed and remains soft, it has stabilized for this income cohort as wage growth has outpaced inflation over the last few years.

Lower-income customers have also adjusted their spending. Fifty-four percent of respondents with less than $50,000 in annual household income said in TD Cowen’s Internet Consumer Survey that they’ve pulled back on spending for apparel and accessories in May, up from 49 percent in April and 49 percent in March. Moreover, spending also is expected to remain stable if inflation continues to moderate in the second half of the year.

For the higher-income cohort, those where households earn over $100,000, there are potential signs of a reduction in spending. TD Cowen noted that white-collar job cuts are surpassing those in blue-collar sectors. The report also noted evidence of trading down , either due to economic advantage or perception of better value. One example of the latter is the rise in the adoption of private labels. That suggests higher-income consumers aren’t as strong financially as once thought. The Internet Consumer Survey also indicates that the percentage of higher-income consumers—those making over $100,000—living paycheck-to-paycheck rose by 300 basis points between February 2024 and May 2024.

As for overall spending cuts for this income cohort, data shows a growing share cutting their spending over the past three months. Just under 50 percent pulled back on their spending in March 2024, ticking up slightly to about 50 percent in April and jumping to just over 60 percent in May. The top category where they are planning their spending cuts is social events and dining out, followed by travel and transportation, and apparel and accessories.

“One explanation for tempered higher-income spending could be a softening labor market,” the report said. It noted that any increase in unemployment among higher-income consumers has a “disproportionate impact on the economy, as the top 40 percent of consumers account for approximately 60 percent of spending.”

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