The most important trend for the industry in 2016 is strengthening consumer demand, and the biggest headwind it will face is bloated inventories. The logistics industry did not perform as well in 2015 as it had during 2014, which was the best year since the Great Recession ended. The good news is that consumers, who in 2014 finally rejoined the economy to become the engine driving the recovery, have not backed off.
Consumer spending, which accounts for two thirds of GDP, has been expanding for most of the last 18 months. However, today consumers are more cautious about spending, save at a higher rate, and have not been willing to expand their credit. Consumers may be spooked at points during the year, but appear to be back in the game to stay.
For a host of reasons, not the least of which is historically low interest rates, inventory levels have surpassed pre-recession levels. This level of inventories is not sustainable and led to a rising Inventory-to-sales ratio. The cost of building up and holding inventory rose significantly in the year and will continue to increase in 2016. Warehousing rates were very low when there was so much excess capacity, but now that the average vacancy rate nationwide is 7 percent. rates are going up.
The biggest reason for low inventory carrying costs in the last five years has been record low interest rates. The Federal Reserve was expected to change that with a possible increase in December. Higher interest rates will have repercussions throughout the industry, but it will be more challenging for those holding products with limited demand.
Rosalyn Wilson, Senior Business Analyst, Parsons