There are times when optimism starts to seep into markets and it creates a ball of momentum that really begins to move those markets. Call it spring fever. Call it real economic recovery. There is a sense that the tide has turned on some sectors of the economy, and without some major shock to the system to slow that growth, this trend should be sustainable leading to a gradual dig out of the recession. Ports are seeing upticks in activity, international markets are strengthening, and some of the commodities that are typically gauges of activity are moving upward.
Note:
Oil Impact: as oil and gasoline prices increase (gasoline is approaching $3 a gallon and diesel is at $2.95 on a national average – both of which are high), more consumers will move to mass transit and the inflationary conditions that high oil prices place on products will work to slow some economic growth.
Freight Transportation:
Ports: News from the West Coast is positive if one is a provider of transportation services, and perhaps worrisome if one is a shipper of goods. Right before the Chinese New Year, US companies had depleted stocks so significantly that many “panicked”, realizing that Asian capacity would be cut for several weeks in the early part of February. That led to a drop in available to capacity (to a crisis level) and a spike in prices (container pricing was at $300/container in January of 2009 and hit $1,500/container this spring). We learned a lot in this situation as shippers scrambled for capacity and in many cases found none. Air cargo from Asia spiked as shippers looked for alternatives to maritime modes. The West Coast ports scrambled for workers to fill gaps in offloading.
So, what happens next?
1. The American Consumer is still not healthy. The flurry of import activity being driven this spring was from businesses trying to restock from their inventory-on-hand lows coming out of January. What this sets up is an inventory rebuild followed by demand weakness in the last of Q1 / first of Q2. In other words, retailers and manufacturers built inventory thinking that the economy would steadily climb out of the doldrums – perhaps only to see the stock sit on shelves a bit longer than they had hoped.
2. But, there are some positive signs that could add to West Coast port activity over the remaining spring shipping season:
a. There are some retailers now saying that sales are improving into the second half of Q1 (American Eagle, Payless Shoes, and others in the apparel sector). Some of the activity for consumers in updating their wardrobes for spring and summer after two tough years of low spending on discretionary items.
b. Manufacturing activity is still improving and the situation with Toyota may push an acceleration of demand for some of the US automakers – Ford being the stand out in the group to capture share. The multiplier effect from this increase in activity for the US auto sector will be significant and will help to make a lot of smaller manufacturers land on firm footing in the next several weeks. But, this new demand will also force a realization that capacity has been drastically cut – and the ramp up time to handle increased demand will be longer than the typical cycle. Wholesale inventories were down slightly for January – which helped to explain some of the building of inventories in the economy and the positive outlook for the near future that some continued building may take place.
Rail: There isn’t much to tell here to reverse previous trends. The rails are starting to see more positive activity across most of its segments. As the Asian economies continue to improve, there will be some increases in freight moving to the coasts as a result. Many analysts have a close eye on intermodal for identification of some strong freight building trends. As shippers use intermodal more aggressively, it indicates that they are taking a longer view of their inventory plays and are willing to start building larger amounts of inventory as a result (transit times are less critical and cost comes more into play).
Passenger Transportation:
Jobs: The outlook for job growth is still weak – and that will affect the amount of commuter traffic that moves over mass transit systems nationwide. But, an interesting dynamic is setting up that could offset this weakness in the job market. This will help to add more riders in mass transit systems – but won’t overcome the weakness in jobs markets in totality.
1. Oil prices are beginning to rise to a threshold that will ultimately push consumers to once again consider mass transit over private transportation. With gasoline getting near to the $3.00 mark across the country (some municipalities will have gasoline prices much higher than that rate), it becomes more advantageous to use mass transit systems.
Air: The airlines are now getting more aggressive in offering low fares to attract passengers – but have put in place sophisticated dynamic planning tools that allow them to quickly adjust prices as flights near capacity. And, as part of the push to get through the recession, each of the airlines took drastic cost cutting initiatives to heart and are operating at operational lows. Any uptick in volume moves largely to the bottom line. With a slight uptick in economic activity, there is a push to get sales people back in front of customers. Business travel will continue to build as companies come out of their slumber and competitive pressures to rebuild relationships continues.
If oil prices continue to move upward, there are some concerns that higher jet fuel prices could hurt all but the most savvy hedgers in the industry (Southwest Airlines for instance). The cost of jet fuel will have to be watched pretty carefully through the early stages of recovery.