…If you’re on both the goods-moving and the people-moving sides of the economy, as we are, you have mixed feelings about the state of the transportation economy right about now.
On the goods-moving side, you can’t be pleased that late last week FedEx came out and flat out said that there’s likely not to be much of a peak season this year in the US. A lot of people look to FedEx to get a read on the economy – and not just transportation professionals, but investors, policy-makers, ordinary citizens – and they do so with good reason.
FedEx is one of the key bellwethers for the global economy. Both it and UPS are watched closely - for one specific reason: they can give the global marketplace a strong indicator of what will happen to the global economy. To add to that sentiment, FedEx and UPS both provide a critical service to many companies conducting international business. With the globalization of the world's business environment (global sourcing, manufacturing, trading, etc.), there are still many reasons to have physical contracts in place prior to starting that business. FedEx and UPS provide international express services that allow companies to get physical contracts anywhere in the world quickly. When this activity is robust and up, we can believe that there will be a boost in manufacturing activity later in the six to eight week manufacturing cycle. Unfortunately, what we got from FedEx this morning was an outlook that was weaker than expected for the rest of the year.
With international package and express volumes expected to be weaker, there is concern in the global financial markets that economic volumes will be much weaker for the rest of the year. That can be a negative force working on the overall business community - and especially for banking and financial stocks. FedEx as a company, and as an equity stock, actually is performing very well. Overall, it has managed costs well against a drop in business volumes. Therefore, as a company, we can be pleased with the direction that FedEx (and UPS for that matter) have taken in managing reduced expectations going into the peak. Unfortunately, what they bring as news of the global economic condition is not entirely unexpected, but disappointing at the same time.
FedEx said that it would continue to focus on growing international package and express volumes. If the economic trends of 2008 and 2009 repeat themselves, we saw a significantly early recovery come from the international markets long before we felt them strongly in the United States. The rebound and health of the emerging markets will feel these early-stage upticks in manufacturing demand likely before we see them in the United States. It is important to continue to watch FedEx and UPS for these early-warning signs as well as to consider other barometers such as the Baltic Dry Index and others.
…..If you’re over on the public side of transportation, you’re a little more sanguine. Congress came back from their autumn break and in an uncharacteristic burst of common sense went ahead and extended the FAA reauthorization bill till the turn of the year, and the major surface transportation bill till next March.
The FAA bill is on its 22nd extension, which must sound like madness to anyone outside the industry, and indeed, sounds like madness to plenty of people inside the industry, but is the way of the world for this bill. At a social gathering your listener might lean forward and say, ‘say that again? It sounded like you said the 22nd extension.” The problems here lately have been labor related (how to count votes in elections to unionize, which powerfully affects FedEx and much less so UPS, which has already absorbed and learned to manage unionized costs), and political rancor surrounding which of numerous small airports to fund.
On the highway bill, a full six month extension gives Congress a time of reflection and study free from the political rancor, while keeping the flow of funds going at the current rate to the states.
This is generally good news as that rate, under one of the versions of the bill proposed, would see funding sink to exactly the level provided by the Highway Trust Fund which, in turn, is funded by the Federal gasoline tax, which is….declining. It’s not indexed to inflation, it hasn’t changed since 1993, advances in miles per gallon and alternative means of getting around means there is correspondingly less gasoline consumed and thus fewer taxes collected, resulting at the end of the day in a decline of nearly 30% for the highway bill form current funding.
There’s a significant gap between what the House and the Senate propose on this bill, but the real gap, and one that is growing, is the gap between the current state of transportation infrastructure and the desired state, a gap that is itself growing.
….You have to have earmuffs on these past weeks to have missed all the speculation about a double-dip recession, or, nearly as bad, a long sustained period of low growth.
If you’re a decision-maker in transportation, you spend a lot of time thinking about this double-dip scenario, and the way you think is very different depending on which mode you’re operating in. Here’s what we’re seeing back here:
Trucking:
- Status: most carriers would be hiring into the peak to manage the frantic pace of shipments to and from retailers. Although companies built staffing levels early in the season, they are now holding those volumes steady at this time. This shows that they are anticipating a slower retail peak season.
- Hours of Service: We received information this week that the October 28th passing of new Hours of Service legislation to remove the 11th hour is likely to get signed by the Transportation Department. The administration is still focused on the potential 75,000 jobs it is likely to create – rather than the inefficiency for the industry it will create – at a time when it appears as though the sector will be scrambling for loads. This could provide the “fuel” for a significant downturn.
- Fuel costs: Diesel and oil prices are dropping in the US. This will help Truckload (full-load) carriers and hurt LTL carriers (reduction in fuel surcharge revenues).
- Competitive thrust: Carriers are scrambling to pick up the expedited shipping business this fall. If the theory holds, retailers will work to restock out-of-stock merchandise by using store-to-store transfers and distribution center inventory rebalancing rather than sourcing new product from foreign markets. The notion being that retailers want a complete sell-through going into the end of the year.
Rail:
- Status: Rail providers are still reporting that they are pulling more cars into service – building strength into the peak. If West Coast projections are accurate, more shipments should be hitting the coast a bit later in September and early in October – which will provide more support for inventory building.
- Commodity demand: There is uncertainty in the global market as to demand levels. If the double-dip recession does happen, there is concern that it will stifle global demand for petroleum products, wood, metal, and even grain supplies. Weaker harvest volumes in the US are also impacting global shipping of grains. A double-dip recession will cut the movement of raw materials in some markets – but create a surprising boost in sales of raw materials in other markets. As we saw in 2009, the Chinese Government used stimulus funds to allow manufacturers in China to stockpile raw materials while prices were “artificially low”. That helped to produce a significant amount of activity at a time when manufacturing was actually slow. That could help to keep the rail sector slightly improving (better than market) – even into a double dip. Unfortunately, the industry will be building volume into a difficult year-over-year comparison – especially as we go into the first quarter of 2012.
Air Cargo:
- Status: Airlines have done a fantastic job of matching capacity to demand. Since there is a different attitude about the management of inventory at this time – the need to expedite shipments at a higher cost will be “hit and miss”. Some retailers and manufacturers will opt for high-speed, more expensive air cargo service to allow them to keep inventories low. These are likely to remain in the high-value goods arena and those types of parts and supplies that can keep an assembly line or supply chain moving. Other products will likely be subjected to tighter cost controls, slower transit times, and will move to alternative modes. This is a normal function in most economic cycles – but could become more pronounced during a double-dip cycle.
- Threats: This may take some of you by surprise, but there are some environmental factors to keep an eye on. At this time, there are more volcanic episodes happening around the world than we have seen in decades. Some of the largest volcanoes in the world are now active again, and the threat of ash shutting down certain geographic markets is a bit higher than it has been in recent years. Although there are no current air space disruptions, markets in Iceland, Indonesia, and even parts of the US are under watch.
Maritime:
- Status: Although there is still a significant risk of overcapacity in the marketplace, some indicators (such as the Baltic Dry Index) are showing surprising strength. With China and European early PMI indicators showing a drop in manufacturing activity below the contraction line, the maritime sector is expected to see weakness through the end of the year. What is not known is whether the first quarter of this year cycles much like the first quarter of 2011, which was fairly robust activity.
- Threats: A double dip would hit the maritime sector hard – especially if global fleets are unable to control their expansion. With new ships coming online all the time, there is a risk that overcapacity will continue into a double-dip. That scenario could hit companies that are already weakened because of the Great Recession – and many of them have much shorter life lines than we saw in 2008. If the slowdown is a soft landing, there is a bit of hope that calm heads will prevail, capacity will be managed, and the slow climb out of the deep depths of indicators like the Baltic Dry Index will continue.
…There’s news on the port side of the world, as the Panama Canal pilots vote to affiliate with the International Longshore and Warehouse Union, just two years before the Canal opens its larger locks. The new locks will allow vessels carrying 12,500 TEUs passage, up from 5,000 TEU vessels currently. The Panama Canal is obviously a huge trade lane between Europe, Asia, and the East and West coasts of North and South America.
Now, the ILWU is the organization responsible for the recent dispute with the grain elevator in Washington State. The language and negotiating stance from union leaders has recently turned more confrontational, and the ILWU appears to be near the front of the pack. Having control over passage through the canal provides the ILWU with enormous leverage at the bargaining table, as a strike by the canal pilots would inflict collateral damage far beyond their actual numbers. Where a strike would normally be confined to one or several ports, it would now affect almost all of them.
….Finally, the American Institute of Architecture’s Architectural Index is a perfectly respectable and professional effort. Through a survey of its members along several metrics, it derives a number – similar to the familiar PMI numbers, 50 or above is expansion, below 50 is contraction – that gives a quick snapshot of the state of the industry.
It’s of concern therefore that this number is in such weak territory, at 45.1. Like many such measures, there were relatively strong months late last year and into this year, measures that are now starting to decline.
There’s a lot more to transportation consulting than architecture, but it surely does include architecture, so there’s not a lot of good news here (which echoes our own Transportation Activity Index, which itself has been in decline but maintains at about the 54 level.)
Another harbinger of a double dip, this AAI chart? I think that goes too far. Something to seriously keep your eye on? Yep. – Larry McGurn