For the first half of 2010, the transportation industry has been partying like it's well 2005.
As the following examples show, activity has been strong across all modes. Consider:
Maritime. The Baltic Dry Index (BDI), a leading economic indicator that tracks prices charged by dry-bulk ocean carriers to move raw materials, rose in early June to 4,041, its highest level of the year. The index's recent move upward has been due to a surge of iron ore imports to China, experts said. The rise dispelled concerns that arose in April when the closely watched BDI hovered around 3,000, leading some to believe the global recovery had stalled. With ships busy and ports increasingly congested, experts look for the BDI to continue rising in the months ahead.
Air freight. After suffering unprecedented declines from late 2008 to early 2009, airfreight volumes have snapped back in impressive fashion. International air tonnage grew at a 26-percent annualized pace in the first quarter of 2010, despite service disruptions from the Iceland volcanic ash plume, according to data from the International Air Transport Association (IATA). Airfreight exports from the key Hong Kong market set records in April, up 54 percent from April 2009 levels. Cargo yields, or revenue per pound, rose 15 percent in the first quarter, with cargo load factors regaining pre-9/11 levels, IATA said. The outlook for air cargo "looks better than it has for the past two years," said Brian Pearce, IATA's chief economist.
Rail and intermodal. U.S. rail volumes of non-intermodal shipments rose in the first week of June by 27 percent over the same period in 2009. Intermodal traffic soared 33 percent over the same period in 2009 and rose eight percent over June 2008, before the financial crisis hit. Intermodal volumes are growing on the backs of improving imports and tightening truckload capacity, which is forcing shippers onto trains almost by default and is leading to significant intermodal rate increases.
Trucking. Demand for trucking continued to be strong through May, according to a key monthly index published by Cass Information Systems, a leading U.S. freight audit and payment firm. An index of shipments grew by 11.1 percent year-over-year, while a measure of transportation expenditures climbed nearly 25 percent over the same period. Both barometers of trucking activity have been steadily rising throughout 2010.
As shipments and expenditures have risen, so have truck rates. This is especially true for non-contractual rates quoted on the spot market. Truck giant J.B. Hunt Transport Services, for example, said in mid-May that its spot market rates are increasing at a faster pace than in the 2003-2005 period, the last sustained up-cycle for U.S. trucking. While contract rate increases have lagged the spot market, they are expected to accelerate in the second half of the year as shippers accept higher rates in contract renewals.
Noel Perry, a partner in the U.S. consultancy FTR Associates, said the freight recession that has gripped truckers since the end of 2006 is, at least for now, history. "I am not at all worried about the next 12 to 18 months," he said.
In fact, the trucking industry's biggest problem through the end of 2011, says Perry, will be hiring and training enough qualified rig and trailer buyers to meet the increasing demand.
Lastly, an index of domestic rail and truck demand published by investment firm Robert W. Baird & Co. rose 6.2 percent in April compared to the same period in 2009. April's figures represented the strongest year-over-year growth rate for any month over the past 20 years, according to Baird analysts. Growth continues to be supported by "sales activity improvement, lean inventory replenishment, and more normal inventory ordering cycles," the analysts wrote.
So where does transport go from here? Some have predicted that the U.S. economy—and by extension ordering and shipping activity—will slow in the second half of 2010 as previously lean inventory levels reach a more normal level and the U.S. government's stimulus spending begins to wane.
One logistics executive at a leading U.S. technology company (who asked not to be identified) said the current strong shipping data reflect business conditions at the "tail-end" of the supply chain. At the front-end of the supply chain, raw material purchases are currently showing "great softness." As raw material purchases are a better indicator of where the economy is heading, the executive expects the U.S. economy to slow significantly in the second half.
Similarly Dr. Donald Ratajczak, the former head of the economic forecasting unit at Georgia State University and now an independent economist, in January offered a sober outlook for U.S. growth in the second half of the year. At the time, Ratajczak said that the winding down of the government stimulus and inventory replenishment efforts that should begin to affect the economy in June or July.
However, in a June 1 report, Ratajczak said the increase in backlogs in the first quarter will trigger continued gains in production and shipping at least for the next two months.
As a result, Ratajczak said he has raised his projections for business inventories and sales. Because sales forecasts have revised higher than inventories, further production increases are likely needed to bring inventory levels in line with sales, he said.
The economist forecasts a 3.6-percent increase in second-quarter U.S. Gross Domestic Product (GDP), followed by a two percent GDP gain in the third quarter due to weakness in the U.S. housing market, and a three percent GDP increase in the fourth quarter.
Among transportation providers themselves the outlook for the second half remains mixed. For example, demand for airfreight services is expected to level off as the replenishment cycle runs its course sometime in the year's second half, said Pearce of IATA. Air freight is viewed as an early cycle indicator because it is sensitive to inventory levels and near-term restocking needs. Still, Pearce said shippers remain confident, and the capital investment outlook, especially among air-reliant technology firms, remains "surprisingly strong."
In the maritime sector, Mike Zampa, chief spokesman for shipping giant APL, said shipper demand "remains strong" at mid-year, and APL, along with other steamship lines, is reporting high vessel utilization. "The unknown is whether the economic recovery is sustainable" into the latter half of the year, Zampa said.
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