As we approach the mid-point of 2013, here is a peek at some of the major trends that are having an impact on freight transportation.

Economic Growth to remain Modest and Uneven

The economy continues to deliver mixed signals. In the past week, the US and Canada reported strong growth in employment. In fact, the 95,000 growth in jobs in May of 2013 is the best monthly number in Canada in decades. The question is whether this was a one month aberration or an indicator of better days ahead? A look past the job numbers tells a different story. Only a few hot spots (such as the shales) are displaying significant growth. Housing and automotive are strong sectors. Additionally, NAFTA-related trans-border activity has presented opportunities for carriers.

At this point, it is hard to build a case that the 2H13 would be much better, especially in light of the mediocre Spring in so much of North America. However, strong automotive production (some plant shutdowns have been eliminated or cut short), the release of pent-up consumer demand accumulated during this year's elongated winter, continued recovery in housing markets, and hurricane/tornado repair/reconstruction efforts on the US could make the 2H13 stronger than some anticipate. But The Institute of Supply Management's monthly index or "PMI™ registered 49 percent in May, a decrease of 1.7 percentage points from April's reading of 50.7 percent, indicating contraction in manufacturing for the first time since November 2012 and only the second time since July 2009. This index will need to be closely watched in the months ahead to see if there will be a sustained improvement in economic activity.

Supply Chain Optimization is Lowering Freight Costs

The New Year will be an exciting one that will likely be shaped by the financial talks currently taking place in Washington.  Here are some of the key trends to watch for in the coming year.

1. The “Fiscal Cliff” Crisis may determine the level of the Economic Recovery in 2013

As the year comes to a close, America is facing a number of economic headwinds (e.g. high unemployment and underemployment, mismatch between job skills required/positions available) and tailwinds (e.g. possible rebound in the housing sector, potential revival of domestic manufacturing, boom in energy production, improving household balance sheets). Senior government leaders in Washington are trying to solve America’s so-called “fiscal cliff” that is casting a dark shadow over the economy. The resolution of this crisis may go down to the wire and will likely set the tone for the economic recovery, or lack thereof, in 2013.  Should America’s leadership come to a good understanding on tax increases and spending cuts, this will place the United States and probably Canada on a more solid path to an economic recovery, even if 2013 is not expected to be a year of robust growth. This will help shippers and carriers in all sectors of the economy.  A failure to reach an agreement, a weak agreement or an agreement to push the problem down the road, will put a damper on discretionary spending, consumer confidence and possibly shove North America and much of the world into recession.

2. America’s Energy Renaissance/ Fracking comes to the USA

America is going through an energy renaissance.  Induced hydraulic fracturing or hydrofracking, commonly known as fracking, is a technique used to release petroleum, natural gas (including shale gas, tight gas, and coal seam gas), or other substances for extraction.  Fracking is allowing America to produce increasing supplies of energy just as the Middle East, the world’s leading source for petroleum, has become increasingly volatile. 

The increase in job creation in Canada over the past two months and the decline in the U.S. unemployment rate to 7.9 percent (that was announced on Friday), paint a picture of a North American economy on the mend.  John Larkin, transportation sector analyst with Stifel, Nicolaus & Company believes that America is in a flat, slow growth mode which is likely to continue. The natural tendency to grow faster than the 1-2% levels seen in recent quarters coming out of recession is dampened by a variety of factors, including the seemingly never ending financial woes in Europe, more tension on the Middle East, a slowing Chinese economy, high unemployment and low levels of labor participation in the US, and worries over the looming "fiscal cliff" approaching at year's end.

He noted that while retail sales numbers in general have looked reasonably strong, when backing out sales of gasoline and indexing for population growth and inflation, retail sales in the U.S. are right now just at levels seen in 1998 - hardly bullish for freight. Retail sales are still down 8.6% today from their adjusted peak seen all the way back in 2006, even though the number is up substantially more than the bottom in Q4 2008.

Larkin also indicated that sales growth at 10 of the largest US retailers was just 1.6% in Q2 - which exactly mirrored inflation, meaning real growth was flat. Housing markets appear to have turned the corner, but remain far from healthy. Recent increases in prices, building permits and home starts are from a low base.

A recent Statistics Canada report showed that Canada’s jobless rate rose to 7.4 percent, a seven month high.  Maththieu Arseneau, senior economist at National Bank Financial in Montreal noted in an interview with the Globe & mail that the current pace of hiring will likely ease.  Mr. Arseneau highlighted a slowing construction industry, global pressures that are impacting manufacturing and a trimming of public sector budgets.  Two major Canadian retailers, Hudson’s  Bay Co. and Shoppers Drug Mart announced plans to cut 210 and 80 jobs respectively, to trim costs in response to competitive (e.g. entry of target into Canada) and regulatory changes. 

How is this all playing out with the transportation industry?