Page 1

Free Whitepapers in this Issue Welcome to the August publication of The Pulse eNewsletter. Our clients are telling us that they are craving quality commentary on what the latest market news really means for industry activity. We've been listening and will be increasing the amount of commentary and analysis that we produce. In anticipation of that I want to highlight some of the high quality work that our team has produced since our last PULSE newsletter.

Is the Economy About to Start Moving? By Noël Perry

What's Going on with Truckload Pricing? By Noël Perry

Intermodal Peak Season Seasonality: Is it Changing? By Larry Gross

The Energy Crisis is Over -- For Now! By Noël Perry

Is the Economy About to Start Moving? FTR QUICK POINT: : Economic recoveries have become steadily weaker, suggesting that the growth rate we have had so far in this recovery may be all that we should expect. COMMENTARY: There is a belief, common among economic commentators, that the U.S. economy will presently begin the sustained healthy growth of a normal recovery. There is some historical precedent for a recovery accelerating after the sixteen quarter point. That’s where we are in this recovery. In the Eighties, the economy reaccelerated after a brief pause - sustaining 3.7% growth until the next recession began fifteen quarters later. In the Nineties, the economy also reaccelerated, sustaining 4.5% growth for the twenty one quarters of its second half. The notion in 2013 is that rising employment will move consumer spending into the three to four percent growth range typical of strong recoveries. In support of this theory, consumer sentiment has risen sharply over the last year. While FTR considers this scenario possible, the data argue strongly for continued slow growth with the chance of recession lurking. Here’s what the data says: 1. First, consider the accompanying chart which shows the average growth during the last six recoveries. Recoveries have clearly become steadily weaker, suggesting that the growth rate we have had so far in this recovery is all that we should expect. 2. Second, there is no precedent for the dramatic acceleration in consumer spending we need for a strong recovery. Consumers usually start spending early in a recovery. Ominously, the only previous recovery without an early surge in consumer spending was the last recovery. Its consumer spending was much lower than its predecessors’ and did not accelerate in its later stage. This also

suggests that modest consumer spending growth is the new normal. One sees the reflection of such realties in the prevailing pessimism in the U.S. transportation sector. With the prospects for rapid freight growth limited, this means that price increases will remain modest unless the pressures of increasing regulatory drag become very strong. Moreover, should the latter occur, the price response will come later rather than sooner.

LEARN MORE: There are several other risks out in the market as it relates to Business Investment, Government Spending, the Global Market, and the behavior of the Federal Reserve. FTR Subscribers stay up-to-date on market developments and how they will effect the business environment. Noël Perry is Managing Director & Senior Consultant with FTR. His innovative work in freight demand modeling, modal price competition and driver labor economics are in wide-spread use. | (888) 988-1699 |

What’s Going on with Truckload Pricing? FTR QUICK POINT: The historical record shows that pricing is closely correlated in times of great market stress – positive or negative. Outside of that external stress, emotional factors seem to matter more than the pure economics of the day. COMMENTARY: FTR forecasts prices by looking at cost increases and capacity utilization. Three things have happened with those variables since mid-2011 that help explain the continued softness in pricing. First, tonnage has not grown as fast as expected, averaging just 2.6% per annualized quarter since the beginning of 2011. Second, the Federal Motor Carrier Safety Administration (FMCSA) has fallen well behind its original schedule of regulatory changes. The Hours of Service (HOS) changes scheduled for June 2011 finally appeared in July of this year (2013), two years late. Note, however, that the FMCSA has offset this delaying effect by adding more regulatory changes to the docket. Now the forecast for regulatory drag is twice what it was in late 2010. Third, the historical record shows that pricing and capacity utilization are closely correlated in times of great market stress – positive or negative. Pricing jumps when the market grows rapidly (2004, 2010) or big regulations change (2004). It falls during recession (2009). At other times the relationship is very loose. During the mid-oughts, pricing rose rapidly despite weak capacity utilization. Recently, pricing has been nearly flat despite slowly growing capacity utilization.

These contrasts suggest that emotional momentum plays a big part in pricing. Following the HOS capacity crisis of 2004, the market apparently expected price increases – and got them. Now, following the Great Recession, the market expects no price increases – and isn’t getting them. There is also the matter of fuel pricing. The historical record shows that carriers are able to use fuel as cover for general price increases. Recent stability in fuel costs has reduced this lever. This whole issue sums up to a big event phenomena. Our forecast has one: FMCSA action. Without that, pricing will remain in limbo with little clear direction. With HOS and the other FMCSA action, the trucking world will change. This is why FTR pays close attention to what happens in Washington. Stay tuned! LEARN MORE: The full commentary, analysis, and a pricing outlook can be found in the July 2013 Truck & Trailer Outlook and Trucking Update Reports. Noël Perry is Managing Director & Senior Consultant with FTR. Noël is the rare economist to specialize in transportation and logistics. His innovative work in freight demand modeling, modal price competition and driver labor economics are in wide-spread use. | (888) 988-1699 |

Intermodal Peak Season Seasonality – Is it Changing? FTR QUICK POINT: : Changes in intermodal seasonality have taken place, but you may have missed them if you were looking at the data incorrectly. COMMENTARY: As we close in on the start of the 2013 peak season, we thought it would be timely to take another one of our periodic looks at the changing face of intermodal seasonality. We hear a lot about the “good old days” when “peak season was really a peak”. The common thread is that today’s peak season is barely a shadow of what used to be. How true is this notion? To find out, we took a look at the last 11 years of intermodal activity using the detailed data available from IANA (Intermodal Association of North America). Because the seasonality of International intermodal traffic is quite different than that of Domestic, we divided the traffic in the usual way. We then looked at three time periods: the five years from 2001 to 2005 (inclusive); 2006 to 2008; and, finally, 2010-2012. We eliminated the Great Recession year of 2009 on the assumption that its unusual profile would distort the results. For each time period, we totaled the revenue movements moving in each calendar month and calculated what percentage of the total annual revenue movements fell in each month. This then gave us the ability to determine how much better, or worse, each month of the calendar year was versus an average month. In aggregate, the changes are modest. January and February have decline in importance, as has April. June, July, and September have shown increases. The first peak month of August has increased steadily if slowly in importance, while the October peak declined from the early 2000’s but has since stabilized.

Our conclusion is that, in terms of overall intermodal, the seasonal patterns are still very intact. However, the top-line figures conceal some important differences between the patterns of Domestic and International. Most importantly, the October peak is more muted for Domestic. All-in-all this is a good thing, in that it helps ensure better utilization for domestic containers and 53’ well cars, and reduces the chances of congestion and dissatisfied intermodal customers.

LEARN MORE: The full commentary and analysis can be found in the July 2013 Intermodal Update Report.

Larry Gross is a Senior Consultant with FTR. His recent work includes studies on intermodal and rail equipment trends, intermodal logistics and terminal location, and inland water/rail competition and cooperation. | (888) 988-1699 |

The Energy Crisis is Over – For Now. FTR QUICK POINT: Did you know that oil pricing has a strong correlation to the amount of spare capacity? COMMENTARY: The energy crisis is over! In 1972 the Club of Rome published its seminal work on global resources, entitled The Limits of Growth. They stated that growth in consumption will eventually exhaust a fixed resource base. When the price of oil quadrupled in 1973, then tripled again in 1978, the concept of The Energy Crisis was born. We know of course that oil prices actually fell and remained relatively low for fifteen years. It is clear now, with the appearance of “tight” oil from shale, what smart oil economists have known since before the publication of The Limits of Growth: markets are constantly working to adjust consumption and resource bases. Those adjustments have extended the life cycle of the petroleum-based energy economy well beyond the limits assumed historically – and will undoubtedly do so again. For the current generation of business people the energy crisis is over. There will be adequate supplies of petroleum through any reasonable business planning horizon. Below is a summary of the coming adjustments and how you can use them to better understand a key cost in transportation: fuel. 1. The Production Surplus: Pricing conditions are a strong function of the amount of spare capacity. When it is below 2 million barrels per day (MBD) prices rise; when above 4 MBD prices fall. 2. Short Run Demand Elasticity: In the short run the demand for crude oil is relatively inelastic to price – people keep buying when the price goes up. This means that prices rise quickly when supplies are tight. It also means that demand, and prices, fall when the global economy slows. 3. Long Run Demand Elasticity: In the long run the demand for crude is significantly elastic.

People eventually find a way to live with less oil when prices rise. The ratio of oil consumption to GDP has been falling in the developed world since the original jump in crude oil prices. 4. Short Run Supply Elasticity: Given the time it takes to find oil and to drill for it, the supply of oil is relatively inelastic in the short run. Moreover, because of the expense of drilling few suppliers have a surplus of production capacity. Only OPEC, principally Saudi Arabia, has any spare capacity. The control of that spare capacity is the source of OPEC’s power. This short run inelasticity also means that supplies do not fall when demand, and prices, fall. 5. Long Run Demand Elasticity: In the long run the supply of crude oil is significantly elastic. Engineers find a way to produce from new hard-toget-at fields when prices rise. 6. Variation: The man sources of instability in oil economics are short term, temporary shocks. The chance of such shocks are high in the current environment. This is the key worry for oil. Politics still counts: The concentration of 28% of oil production in the politically-unstable Persian Gulf means that the favorable economics of the current oil market could be interrupted by war or revolution at any time. LEARN MORE:The full commentary and analysis can be found in the July 2013 Transportation Fundamentals Newsletter Written by FTR’s own Transportation Economist, Noël Perry. Noël Perry is Managing Director & Senior Consultant with FTR. His innovative work in freight demand modeling, modal price competition and driver labor economics are in wide-spread use. | (888) 988-1699 |

Free Whitepapers in this Issue Thanks for reading the Pulse! Sign up for the Pulse eNewsletter and stay informed about the transportation situation with current insights from FTR’s experts. Click Here to Sign Up

Pulse eNewsletter August, 2013  
Pulse eNewsletter August, 2013