2015 Outlook

   At the time this column is being written, the data indicates the global economy and international trade are likely to continue growing in a sustainable way in 2015, supported by the ongoing U.S. recovery. The not-so-good news is that congestion issues faced by the freight movement industry in the United States and in many other parts of the world could continue. Hopefully, actions being taken now will provide some relief. Insufficient policy support for infrastructure is a major barrier to a positive longer-term outlook.

Review Of 2014.   As the corresponding chart shows, the United States has been a major contributor to global economic growth. The chart groups the countries relative to their role in the world economy. Countries on the left are major consumers of goods manufactured by the countries grouped in the middle which, in turn, use raw materials imported from countries on the right. The chart shows that the European Union economy has slowed global growth despite positive trends in some of its member countries. Slow demand growth in major developed economies weakened demand for goods exported by emerging market economies, with Mexico being an exception. Anemic economic growth in Europe and Asia translated into weak commodity demand. Energy, metal and agricultural commodity prices have declined in 2014 due to production increases and weak demand growth. This has negatively impacted commodity-exporting countries such as Canada and Brazil.
   U.S. economic recovery has been stoked by the Federal Reserve keeping interest rates at historically low levels because that has kept down the cost of borrowing to buy goods such as automobiles and homes. Sales of both have increased in 2014, with automobile sales exceeding a 16 million annualized level in each of the last six months for the first time in 10 years. Despite low interest rates, home sales are still weighed down by lenders who are cautious about approving new loans in the aftermath of the national real estate bust. Growing consumer spending has prompted companies to increase hiring, which in turn boosts consumer spending further.
   The recovery in the United States is not only visible in spending and employment data but also in industrial trends. Capacity utilization across many U.S. industries has returned to pre-recession levels. 
   At this stage the Fed has indicated that it expects to start raising interest rates soon. However, inflation has been very low and therefore there is little pressure on the Fed to start doing so. If anything, inflation has been too low. Central banks prefer to see inflation around 2 percent. Below that level the risk of a deflationary cycle is very high.

Preview.   The global outlook depends on the United States. Since the U.S. economy is almost operating at full capacity, the Federal Reserve has begun to step back from its expansionary policies. In October, it announced the end of its bond-buying program, referred to as Quantitative Easing. 
   The Fed has been able to keep interest rates low because inflation has been unusually low. Once inflation picks up the Fed will likely raise interest rates to slow economic growth. The big question then is what will cause inflation to rise? Given that commodities prices have declined and labor market conditions are still slack this may not happen until the latter half of 2015. 
   Central banks in Europe and Asia have reacted to weakening growth in those regions. The Bank of Japan has been engaging in the same measures as the Fed to pump money into the economy to support growth. The European Central Bank recently downgraded its Eurozone GDP growth forecast to 0.8 percent in 2014 and to 1.1 percent in 2015, while at the same time it has announced policies that closely resemble those in the United States and Japan. Other central banks have also begun pursuing expansionary policies. 
   With the Fed biding its time to raise interest rates and other major central banks pursuing expansionary policies, 2015 could see very strong growth. The world economy may seem anemic, however, the old Wall Street mantra “don’t-fight-the-Fed” applies. With central banks in major economies more concerned about growth risk than inflation risk, it is unlikely that economic growth will be stagnant or even contract.

Freight Movement Impact.   Continued expansion of the U.S. economy usually results in sustained growth in domestic and international freight movement. Imports are likely to grow in the 4-8 percent range. Exports may grow a bit slower, in the 3-7 percent range due to weaker economic growth among U.S. major trading partners. The main risk to this view is that freight volume growth exceeds the upper end of these ranges.
   Export growth is also hampered by the potential for the U.S. dollar to further increase in value relative to other currencies. When the dollar increases in value, imported goods become cheaper to U.S. importers and exported U.S. goods become more expensive in foreign markets. Rising interest rates in the United States, combined with flat or declining interest rates in other countries, has historically resulted in the dollar increasing in value against other currencies. 2014 has not been an exception. With the Fed likely to raise interest rates in 2015 and central banks in other countries less likely to raise interest rates, the dollar is more likely to gain value in foreign currency markets than to lose value.
   Imports have been impacted by congestion at U.S. ports. Many factors came together to create this situation: larger ships calling at terminals earlier than expected, insufficient chassis to handle the volumes, inadequate chassis management relative to the increase in volumes, truck driver shortages and increased pressure on railroads to move goods following an unusual winter pattern of decreased time intervals between severe storms that left the industry with a backlog. 
   While the freight movement industry is reacting to congestion, it is not clear that enough is being done. At this point the data indicates that U.S. container volumes in 2014 will have exceeded the 2008 peak level. Railcar volumes are almost back to their 2007 peak level. The American Truck Associations’ truck tonnage index is well above its previous peak. Air freight volumes have also been recovering. The freight movement industry looks set to enter unchartered territory in 2015.

Challenges To Outlook.   With an aging population it is difficult to expect U.S. economic growth to be sustained at its long-term average 3 percent rate. Productivity growth would have to be much higher to achieve that. Transportation infrastructure plays a critical role in this regard. It is worth emphasizing the freight industry’s ability to navigate the unchartered territory it is entering in 2015 and beyond is challenged by:

• No motive—Lack of a long-term U.S. transportation bill, much less a National Freight Policy.
• No means—Lack of full use of the Harbor Maintenance Tax or a properly funded Highway Trust Fund.
• No opportunity—Lack of timely waterside and landside infrastructure at ports to handle the very large containerships.

   Under these circumstances we can expect more friction over issues, such as crude by rail competing with agricultural products for capacity, thus slowing exports and limiting their ability to compete in the global market place.  
   Kemmsies is chief economist at Moffatt & Nichol, an infrastructure advisory firm. He can be reached at (212) 768-7454, or by email.

This column was published in the December 2014 issue of American Shipper.