Time for the Tough to Get Going

By Chief Economist Walter Kemmsies of Moffatt & Nichol

The world economy is circling the drain, but eventually some combination of policy and self-correcting market forces will bring that to an end, and growth — particularly in trade — will subsequently improve.

Most segments of freight transportation are likely to see capacity expansion in several years, driven by federal funding for infrastructure and ongoing investment in railroads, intermodal facilities, and inland ports, as well as increasing ship sizes due to the expansion of the Panama Canal. Segments of the freight transportation network, such as ports, which don’t keep up with investments elsewhere, could become bottlenecks.

Growth Will Resume
Long-term trends in global trade of manufactured goods were discussed in the November 2008 column. The key points were:
• Between 1950 and 2007, world trade has grown at a compounded annual growth rate of 7.6%, about twice as fast as global real GDP.
•  Over the last 10 years, the pace slowed to 6.6%, but is still slightly more than twice GDP growth.

• During these six decades, trade in manufactured goods declined on three occasions: in 1975 (4% decline), in 1982 (2% decline) following large spikes in oil prices, and in 2001 (1% decline) after many of the world’s economies experienced a recession.

Recent performance of the world economy is unlike any other period since World War II, but could be thought of as a combination of the 1970s oil price shock and the 1980s Savings and Loans crisis. Given that the world is more globally integrated, problems in the U.S. have had a faster and more widespread impact than might have been the case thirty years ago.

Eventually a combination of policy and self-correcting market forces will stabilize the economy. Trade and overall economic growth are expected to be sluggish for a few years as consumers repair their balance sheets. However, the structural factors such as demographics, which have underpinned trade growth, remain intact and long term trends will re-emerge, just like they did in 1976, 1983, and 2002.

Difficulty Accessing Capital
Financial capital is in short supply because the ballooning federal deficit is absorbing it, and the troubled banking sector is less willing to make loans. However, part of the increase in the federal deficit will be a result of investment in infrastructure as indicated in the House’s January 15 proposed American Recovery and Reinvestment Bill of 2009.

The Recovery Bill described the infrastructure investment priorities, which for the transportation sector total $90 billion, with the funds earmarked as:

• $30 billion for highways
• $31 billion to modernize federal and other public infrastructure with investments that lead to long-term energy cost savings
• $19 billion for clean water, flood control, and environmental restoration investments
• $10 billion for transit and rail to reduce traffic congestion and gas consumption

Given that last year, the AASHTO estimated the cost of repairing America’s bridges to be $140 billion, the amounts indicated in the Recovery Bill seem to be insufficient. Perhaps reauthorization of SAFETEA-LU will provide further funding. Even then, the amounts mentioned thus far don’t even cover the bridge repair bill. The balance will have to come from state and local governments, which are also under fiscal stress, as well as the private sector.

There are other infrastructure priorities, such as oil, gas, and electricity production and transmission, which have suffered under-investment since deregulation. Schools, hospitals, and public housing improvements are also listed as a priority. In every infrastructure segment there is also a need to invest in environmental impact mitigation and energy savings.

In short, there is a long shopping list and insufficient public sector funding available. However, private sector funding is available. A recent report issued by several investment banks and major private equity funds estimates that in January 2009, there was $180 billion of private equity capital available for investment in infrastructure.

Ports Could Become Bottlenecks
Assuming that funding is made available for highway improvements, railroads continue their ambitious capacity expansion investments, and development of intermodal facilities and inland ports continues to gain momentum, surface transportation of freight could become a lot faster.

Meanwhile the expansion of the Panama Canal, which will allow significantly larger ships to traverse it, is proceeding. Although the difficult economic environment has slowed the pace of ship orders and deliveries, larger ships have increased their share of the global fleet. This trend will continue even after the expansion of the Panama Canal is complete.

Between a faster surface transportation system and larger ships, ports could become a bottleneck in the international trade network if they don’t increase their capacity at a commensurate pace. The need for funding is significant since many ports will require dredging to accommodate the larger ships. More acreage and/or cargo-handling equipment will also be needed. All of this comes on top of increased pressure to invest in environmental impact moderation. The longer ports wait to establish their investment programs and line up the resources, the more difficult it may be later, particularly as the global economy and trade volume improve.
The time to refine and prepare capital improvement programs, as well as procure funding, is not later, but now.

In This Issue

New Items

Time for the Tough to Get Going

Supply Chain
Real Estate Responds to Supply Chain Shifts

Taking Your Ship to an IP Environment

Compliance Corner: SOPs, the Foundation of Trade Compliance

New Applications for RFID

Features
Gateway at a Glance ­– Canada

Moving Goods in a Slower Economy

Ports & infrastructure
National Gateway — a Public-Private Partnership in Progress

California River Ports

Port Products
Clean Air Equipment

Commentary
Contract Negotiations Approaching

Who, What, Where, When

Final Say