Many moving parts

   Freight infrastructure and logistics planners have to consider a wider than normal range of data when making investment decisions these days because pretty much everything is changing. Cargo volumes in some segments, notably containers and trailers, rose above their pre-recession peaks in 2014 and continue to increase, driven by consumer spending. Given low investment levels in freight infrastructure since the end of the recession it is not surprising that cargo volume recovery has been accompanied by congestion. The problem now is to determine whether many inexpensive “fixes” will suffice to keep freight moving or whether economic growth will continue at levels requiring significant investments.
   With financial markets roiling, concerns that the U.S. economy is not ready for the Federal Reserve to start raising interest rates, uncertainty about China’s economy and falling commodity prices, some trepidation about committing to significant infrastructure investments given this economic backdrop is understandable, but not justified. 
   What matters a great deal more under current circumstances is to identify and understand the trends that are most significant to planning and investing. They include:

• Changes to the infrastructure that supports trade.
• Justification or rationale for the investment.
• Outlook for the U.S. and world economies.

   The changes to freight movement infrastructure are well known. These include expansion of the Panama Canal, larger ships and improvements to port infrastructure, as well as channel deepening. Railroads are also improving their networks by investing in more miles of track and rail yards. These trends have the potential to affect how freight flows internationally and domestically. Segments of the industry failing to invest and adapt to these changes could be adversely affected.
   Public sector finances are not in great shape. Despite the economy recovering, the federal government is still running a deficit and the United States’ debt-to-GDP ratio is at a post-World War II high. State government finances are generally not that much better and they have had to step in where federal spending has left off. To spend scarce public sector funds, the infrastructure investment has to be extremely well justified these days. This is likely to continue to be the case since there are many pressures on the public sector budget, not the least of which is the rapidly growing number of people reaching retirement age. The Congressional Budget Office now estimates that the Social Security system will be bankrupt by 2034. 
   Fortunately, the outlook for the world economy is a lot more benign now than it has been in the last 20 years. Prior to 2008 global economic and trade growth was based on unsustainable trends. Although growth is lower these days, it is now based on firmer and more sustainable trends.
   Prior to the 2007-2009 recession U.S. household spending on goods grew at an average 4.2 percent annual rate, partly funded by credit and home equity loans since wage and employment growth were not sufficient. Strong consumer spending trends helped China attract a large amount of manufacturing activity that resulted in a high rate of export growth—primarily to the United States. Investment spending in China increased significantly, peaking at almost 50 percent of its GDP by 2010. The average level for developing economies is 20-30 percent of GDP and for developed economies about 15-25 percent. This is a main reason why China’s GDP growth rate was so high over the few decades. However, that was not sustainable.
   Since the recession U.S. consumer spending on goods has averaged 3 percent per year, tracking employment and wage growth more closely. The residential real estate market has been recovering slowly based on more solid fundamentals than in the years prior to the last recession. Overall, there are few reasons why the economy would be derailed. The primary concerns are the Federal Reserve’s growing belief that recovery no longer requires historically low interest rates. Financial market trends have indicated that investors are apprehensive that the Fed may act too aggressively. However, the Fed has not indicated that it believes it will have to be aggressive. 
   In its 2011 five-year plan, China made it clear that high growth based on investment spending was not sustainable and it needed to develop a domestic consumer market. Exports have been growing more slowly, which is consistent with the government’s policy to foster domestic demand. Furthermore, it has been changing its policies to make the economy’s development driven more by market forces than by government actions. This underlies the recent fluctuations in the foreign exchange value of the renminbi. However, despite the fact that retail spending is growing at a rapid rate—recently 10.8 percent year on year—China may have been hasty in its shift away from investment and export driven growth. The government recently made a boost in public sector spending to offset weakness in the industrial sectors.
   Meanwhile, the Eurozone economy experienced two recessions since 2007. The recessions were the result of a public sector debt crisis that required new policies and regulations to resolve the situation. It took a while for this to happen. Recent data indicates the Eurozone is past its worst point, with GDP growth rising in the last quarter.
   The bottom line is that although economic growth in the near and medium term does not look like it will be as high as it was a decade ago, it is better supported by fundamentals. Given that the freight movement industry is changing and public sector funding may be hard to come by, the time to make investment decisions to be well-positioned in the long run is now.
   Kemmsies is chief economist at Moffatt & Nichol, an infrastructure engineering firm. He can be reached at (212) 768-7454, or email at wkemmsies@moffattnichol.com.

This column was published in the October 2015 issue of American Shipper.