FTR’s senior transportation analyst Todd Tranausky gave a strong, positive outlook for intermodal volume and revenue growth in 2018 during FTR’s monthly State of Freight webinar Thursday morning. Tranausky laid out the underlying economic conditions supporting intermodal traffic, identified some capacity issues that are constraining further growth, and then mentioned some downside risks intermodal faces.
We’ll go through the economic fundamentals Tranausky outlined first: he noted the steady upward trend of payroll employment, which means that there are more people working and more people with disposable income who can buy things like washing machines and big-screen TVs—big ticket consumer items characteristic of intermodal freight. The Chicago Fed’s national activity index is off its crazy highs from Q4, but still well above the GD growth rate, which means aggressive growth and a good sign for intermodal. Retail sales are similar; down off highs but still posting really strong year-over-year growth.
Retail sales support intermodal growth “because nothing moves if someone doesn’t place an order for it,” said Tranausky. New home sales were the same story—coming off highs but still strong year-over-year growth. Tranausky said that new home buyers are moving out of apartments or small, starter homes, and purchase things like couches, televisions, and refrigerators, which are, again, typical intermodal freight. Tranausky said that automotive sales are healthy—lots of auto parts move by intermodal—and the sector has reached a 17M unit annual run rate for 2018.
“Business inventories are down, too, especially from 2016,” said Tranausky. “That means when people order things, it’s not already in the warehouse, which requires more movement. That’s bullish for intermodal demand; if folks have to replenish inventories to support strong sales numbers, that’s great for intermodal,” he continued.
Then Tranausky got into the metrics of the intermodal market itself. He said 53 ft trailer volumes were down off their highs, but “a step function above where we were year-over-year”: for example, 53 ft trailer volumes in February 2018 were up 19% YOY. Since the second half of 2017, every month has posted double digit YOY growth. Tranausky said that some of the growth in trailer volume should be attributed to the difficulty of finding intermodal containers: as rail service deteriorated, intermodal container lengths of cycle increased, tying those containers up on trains that either aren’t moving or are moving more slowly than they should be.
How do we know rail service is deteriorating, and why is it happening? Over the past year, every single week rail velocities have been down compared to that week the previous year. “We’re basically 1 mph slower than we were a year ago,” said Tranausky. “Anyone who ships rail knows that makes a huge difference in the overall fluidity of the network,” he said. Tranausky said that challenging weather conditions in the first quarter have slowed rail movements and switching down, especially in Canada, but claimed that the larger issue is that the Class 1 railroads’ focus on lowering their operating ratio (OR) meant they cut costs by putting a lot of equipment in storage. When volumes shot back up beginning in the second half of 2017, there’s a long lead time to get that capacity back online. “If you look broadly, beyond the weather issues, you’re already seeing signs of stress in the system [related to higher volumes],” Tranausky said.
Tranausky said that FTR expects mid- to upper single digit growth YOY for international container volumes, and 10% growth above seasonal trends for intermodal domestic equipment loadings. Overall, international (containers and trailers) and domestic, FTR is calling for 6% YOY growth for 2018.
Risks to intermodal traffic and the macroeconomic environment closed out Tranausky’s presentation. He focused on three major worries: tariff complications, including NAFTA renegotiation, rising interest rates, and the out-of-control federal deficit. Tranausky said that cooler heads were likely to prevail and prevent a full-on trade war, but that NAFTA renegotiations posed a more realistic threat to intermodal traffic. He said that NAFTA talks would become a political football as we move closer to November midterm elections and a Mexican presidential contest in July, where the leftist-nationalist candidate, López Obrador, has been gaining momentum. Automotive and automotive parts traffic out of Mexico could be on the chopping block if the United States and Mexico shift toward protectionism.
Rising interest rates also affect intermodal traffic. Customers who use intermodal rail have to carry more inventory than customers who use trucks to replenish their stocks, because rail velocities are slower and can be subject to more delays. Rising interest rates mean an increasing opportunity cost for carrying inventory, because instead of sinking their money into tangible products sitting in a warehouse, they could invest that cash and have it generate a decent return. If higher interest rates made companies change how they thought about inventory, they might switch more to just-in-time delivery schedules by truck, and intermodal traffic might lose volume.
The last risk listed by Tranausky was the ballooning federal deficit, which is more of a macroeconomic risk than a specific threat to intermodal traffic. He said that a really high deficit undermines consumer confidence in the long term and and is a one of the major structural issues in the economy. “If you look to debt-to-GDP ratios going out, 5-6x is historically high, and unsustainable… as we get to 2019-2020, difficult decisions might undermine our economic fundamentals that support intermodal traffic,” said Tranausky.
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