with Walter Kemmsies
Recent statements by the Federal Reserve indicate it believes the economy has improved sufficiently and it’s about time to start disengaging from the extreme measures it used to help bring about the recovery. However, many gauges of economic activity, including foreign trade, are barely back to the levels they had reached prior to the beginning of the Great Recession in December 2007.
A review of economic trends indicates that peak levels of activity reached prior to the Great Recession in many sectors, especially real estate, may not have been supported by fundamentals. If indeed that’s the case, then the current levels of activity in the freight movement industry, despite being below their previous peak levels, represent recovery levels and those involved in planning for the future may have to revise their forecasts.
The Great Recession in the United States, which officially ended in June 2009, was the longest and deepest recession since World War II. According to the latest revised macroeconomic data published by the Department of Commerce, it took eight quarters for real GDP to regain its previous peak level (from 2009 to 2011) reached in the fourth quarter of 2007. Overall economic activity remained below the 2007 level for four years. Prior to this recession the average time it took for GDP to regain its pre-recession level was two quarters.
Other indicators of economic activity have not recovered to their prior peaks. Sales of homes have been growing at a healthy clip but have not returned to levels that prevailed in the early 1990s, much less those seen during the bubble years 2001-2006. Annual sales of automobiles were in the range of 16 to 16.5 million prior to 2007, at the worst point they declined to an 8 million pace in early 2009. Currently sales are running at about 15.2 million. Unemployment has remained high, averaging 8.1 percent during the past two years.
Several trends that began in the late 1990s substantially weakened the U.S. economy. For starters, when China joined the World Trade Organization many companies began closing factories in the United States and opening them in China. American jobs were not only lost to workers in other countries but also to machines. The information and communication technology investment boom that began in the 1990s has seen automation eliminate jobs faster than new ones were created. Manufacturing employment in the United States declined from 12.2 million almost continuously from the time when the 2001 recession began until it bottomed at slightly below 8 million in 2010 and since then has hardly increased. Instead of unemployment returning to an average of 5 percent as was the case between 1995 and 2007, it could end up stuck at 7 percent because even if manufacturing continues to recover in the United States, not as many jobs will be generated as in the past due to automation.
Employment growth during the 2001-2007 period was very low compared to other post-war expansionary periods. Household incomes also grew more slowly. Remarkably, consumer spending remained high, fueled by easy credit and potentially by rising homeowner equity that many were able to tap into via home equity lines of credit (HELOCs). Interest rates on car loans were also very low. It is likely that without the easy credit household purchases of homes, autos and retail goods would have been much lower. If so, then the current levels of consumer spending represent recovery levels, even though they are below their 2007 levels.
The transportation sector has not been immune to these trends either. The American Trucking Associations’ truck tonnage index is above its previous peak, as are intermodal volumes (trailers and containers). However international container volumes at U.S. ports in 2012 were still slightly below their peak levels reached in 2008. In 2013, volume growth has been low but enough for the previous peak of 2008 to be exceeded. Faster growth of truck and rail volumes compared to that of ports reflects several trends. (1) Domestic freight movement has grown faster than international trade since the U.S. economy has remained on a recovery track while other major economies, such as Europe and Asia, have either been in recession or slowed. (2) U.S. trade with Mexico has been growing at a high rate for the last several years. Mexico has invested in freight movement infrastructure and is rapidly becoming a major global manufacturing center. Since 2009, U.S. imports from Mexico have grown faster than those from China.
Where do we go from here?
Globally, the number of households that are considered to have middle class incomes and spending power has increased, more so in emerging market countries such as China than in mature developed economies. This means U.S. companies that are able to sell into these international markets are likely to grow faster than those which only focus on the domestic market. Workers displaced by offshoring and automation should be able to find employment in export-oriented industries. Thus, it is exports that can change the U.S. outlook from low growth and chronically high unemployment to prosperity.
The United States has comparative and competitive advantages in the production of many commodities. However, many of these commodities, such as agricultural goods, are sensitive to freight costs. For the United States to increase these exports investment in infrastructure is needed to keep costs down and therefore increase the geographic areas of the world where these commodities can compete.
While the near-term outlook for the U.S. economy, and therefore freight volumes, is relatively poor, this can change if some of the nascent efforts in Washington to develop a freight movement infrastructure are successful. Freight industry planners should expect modest growth in the next few years, but keep a watchful eye for developments on the infrastructure policy front as the long-term outlook could improve quickly.
Kemmsies is chief economist at Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or by email.