Transportation: Recession and Recovery

This latest recession took an especially large toll on the U.S. Industrial markets. While the overall economy lagged with a 3-4% contraction, the Industrial Production Index (production excluding technology) showed a peak to trough drop of 18%. This monumental drop in the industrial markets has had a drastic effect across all transportation sectors and modes.

Although transportation took one of the largest hits throughout this recessionary period, the industry actually has a lot to look forward to. As steep and dramatic as the downturn was, the industry is showing strong signs of recovering at an equally impressive pace – however the recovery has just started and there is a long way to go.

Rail, which showed double-digit declines for all Class-1 railroads in 2009, is experiencing substantial recovery. While volumes have not yet returned to the peak volumes experienced in 2007, key indicators are all pointing towards a return to sustainable growth in the near future. One very positive sign is the broad base of the recovery, with 18 of the 21 rail commodity subsectors expanding over the last year.

In recent history, U.S. ports have consistently expanded at 7-8% per year. In 2009, U.S. ports experienced their first ever downturn, with total TEU volume dropping 9%. This drop was short lived, and based on the strong YTD performance of the major ocean carriers, we are projecting the sector to return to its standard growth rate of 7-8% in both 2010 and 2011. So far in 2010, container volume for imports and exports has expanded at 15% and 10%, respectively. This imbalance is very surprising and is something that we will continue to monitor to see if the trend continues.

Also bolstering the future of the shipping industry is the ongoing project to expand the capacity of the Panama Canal. This project will open East Coast ports to opportunities to handle larger ships coming from Asia, thus expanding potential container volume. In preparation, many East Coast ports are improving operations, dredging channels and modernizing their terminals.

The trucking industry is also recovering at an impressive rate, but several external pressures will need to be addressed before we can fully understand the future of the sector. Concerns over driver shortage, artificially low prices, uncertainty in fuel prices, road congestion, and other factors are causing some experts to question where trucking’s market share will end up, especially with the increased competition from rail and short-sea shipping. Despite these challenges, prices are on the rise (6-10% YTD) and trucking continues to be responsible for 4 of every 5 movements of goods nationally.

Now how does this recovery in the transportation industry affect your supply chain? As transportation prices rise, there are three major impacts to consider. First, service levels become harder and more expensive to maintain. Second, distribution freight consolidation has less value. And finally, global sourcing and off-shoring becomes less attractive. Real estate trends that we are seeing in response to these impacts include: increased inventory levels, the deployment of staging/storage space closer to customers, and an increase in domestic sourcing and manufacturing.

As the times continue to change, shippers will have to be even more cautious, implementing both tactical and strategic measures to stay ahead of the curve. Now is the time for anyone moving goods to look at your supply chain and ensure you are well-positioned to remain competitive in the midst of the changing transportation environment.

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