Key issues for the freight movement industry in 2018 include tightening capacity across modes, the truck driver shortage, the ever-increasing size of containerships, and the continued shift to omnichannel distribution methods, according to Walter Kemmsies.
The 2018 outlook for the economy and, therefore, freight movement can be summarized as a rising tide that will lift all boats, but will also be partially offset by the crosswinds of changes in policies and political tensions within and between countries.
Given that there is a lot to be gained by virtually all economies from cooperation and coordination, including revisions to trade agreements, 2018 looks likely to see even stronger economic and trade growth than in 2017. Aside from the need to adapt operations to new regulations and accelerate a backlog of investments to relieve congestion, the outlook is also very positive for the freight movement industry.
Global Backdrop. The European economy, which struggled with several public sector financial crises and bouts of deflation over the last 10 years, saw real GDP growth accelerate from 1.9 percent in the last quarter of 2016 to 2.6 percent in the third quarter of 2017, exceeding U.S. real GDP growth in each of the first three quarters of 2017 on a year-over-year basis.
From 2009 until 2016, the United States was largely shouldering the burden of leading global economic growth by itself. With both the U.S. and European economies growing faster in 2017, demand for manufactured goods imported from Asia increased. This, in turn, has increased global demand for raw materials, with commodity prices increasing. Stronger raw material demand and higher prices have helped commodity exporting countries in Latin America and Africa, as well as Russia, India, Canada and Australia.
China is also looking at celebrating the anniversaries of some of its significant historical political events, which is likely to see construction on par with the 2008 Olympics preparations.
Both the United States and Europe are moving away from expansionary central bank policies, as trends in those economies continue to indicate that growth is self-sustaining. Meanwhile, inflationary pressures remain low, which means that central banks are not under pressure to raise interest rates aggressively enough to provoke a recession. As long as this continues to be the case, global economic growth is likely to maintain and possibly exceed its 2017 pace.
U.S. Backdrop. 2017 saw economic activity shift from low growth and capacity utilization that characterized the prolonged recovery from the severe 2007-2009 deep recession to a pattern more consistent with the mid-cycle phase of the business cycle.
Investment in plant, property and equipment—or capacity—is supporting higher GDP growth in 2017. Employment, consumer spending, manufacturing, as well as exports and imports, all increased at a better rate than in the last few years.
As the global economy began growing faster, the U.S. dollar’s foreign exchange value declined, as expected. A weaker U.S. dollar combined with higher commodity prices has helped U.S. exports.
The only significant legislation passed at the federal level in 2017 was tax reform. The bill, which drastically lowered the corporate tax rate, should support higher economic growth due to improved incentives for companies to invest. This could be further enhanced with significant efforts to reduce regulatory burdens on businesses.
If an infrastructure investment policy is developed and deployed in 2018, it would also provide additional incentive for companies to invest.
The reductions in state income and real estate taxes and mortgage interest deductions from deferral taxes could negatively impact consumer spending. However, on balance, it is likely that an increase in investment spending and, consequently, employment may offset any negative factors that could affect consumer spending.
Industry Issues. The key question for the freight movement industry in 2018 is how it will deal with tighter capacity, which on the positive side is sufficiently spread across the United States to allow for rate increases, but on the negative side is being made more difficult to manage due to the changing operating environment.
The specific focal issues for the cargo industry are:
• The worsening truck driver shortage and less maneuvering room due to electronic logging device (ELD) requirements for all freight trucks;
• Congestion resulting from imbalances in capacity investment in major freight corridors. More specifically, highway capacity in key freight corridors has not kept pace with traffic increases;
• Ocean carriers investing in larger ships and ports focusing on improving their navigation channels and berths in order to accommodate these ships. In many locations, investment in roadway capacity near ports has not kept pace, making it more difficult to service larger vessels efficiently and slowing the flow of containers from the terminals;
• Retail shifting to omnichannel distribution, a blend of traditional brick-and-mortar distribution and e-commerce logistics strategies. While e-commerce purchases are more convenient for consumers, the sellers need to deliver within a sufficiently short time, so that they can compete effectively with an in-store shopping experience. Pure e-commerce retailers need to hold inventory in more locations in order to compete. Add this to the inventory held by brick-and-mortar retailers, as well as the need to hold more safety stock due to congestion and truck driver shortages, and it’s no surprise that the inventory to sales ratio has increased. Inventories may be reduced by pursuing an omnichannel strategy, whereby order fulfillment centers can be used to keep less inventory in stores. Retailers are thus reworking their distribution networks, and the freight movement industry will have to figure out how to support them;
• The impact of investment in technology on the freight movement industry, specifically supply chain visibility, chain of custody, capacity allocation and automation, and the highly fragmented market with many solutions and providers complicating the decision process for logistics practitioners;
• Investing in capacity in such a changing environment. This is not a simple task and could lead to decision paralysis and extended capacity problems.
Policy Still Matters. The extreme actions that the Federal Reserve took and the massive fiscal deficits were designed to help pull out the economy out of the deep swoon of 2008-2009. While the efficacy of these actions are likely to continue to be debated for years to come, boarder policy changes may be required in order to reverse the longer-term downward trend in U.S. economic growth over the last 30 years.
The current administrations focus on revising trade agreements, most of which were developed decades ago in a world economy far different from today’s, to reflect current economic conditions is sensible.
Tax reform, if accompanied by a sound infrastructure policy, is also needed. After all, the United States has helped create a global economy with a growing middle class. Participating in selling to that market will help reverse the slowdown in U.S. economic growth. However, U.S. trading partners and institutions will have to cooperate in order to effect such change.
The key questions are whether the resistance to these changes can be overcome and, equally importantly, whether the changes will be beneficial to the economy at large. This creates some uncertainty about how 2018 will pan out. Hopefully, reasonable compromises can be achieved for the greater good.
Kemmsies is managing director, economist and chief strategist for JLL Ports, Airports and Global Infrastructure. He can be reached by email at walter.kemmsies@am.jll.com.