Low inflation, steady job growth, and lean inventories bode well for intermodal.
Steady economic growth is expected to result in another good year for freight transportation providers. As predicted last January, intermodal volume rose 2% in 1996, and traffic levels should rise another 2-4% this year. While there is a lot of upside potential for intermodal, there are also some factors that could negatively impact freight demand.
First, the good news. The economy is projected to continue growing at a moderate pace; the Federal Reserve Board has not moved to raise interest rates; and inflation remains in check. In fact, the core inflation rate is trending downward, even though the economy is near full employment. And based on preliminary figures, year-end inventory levels were not excessive. Consumer demand during the holiday shopping season was strong, and consumer confidence remains high.
The combination of low inflation, steady job growth, and lean inventory should increase traffic levels in '97 at least at a pace equal to that of economic growth.
Another factor that is expected to increase intermodal freight demand is a reduction in the amount of excess equipment in the motor-carrier industry. Indeed, increased traffic levels in '96 helped work off some of the excess. While the demand/supply equation is not at equilibrium, the surplus capacity should be worked off during the first half of the year.
Differing cost structures between intermodal and over-the-road movements will also boost intermodal volumes. Fuel prices remain 15% above year-ago levels, and there is nothing to indicate that prices will decrease in the near future. Trucking also faces a number of issues, including stricter clean-air requirements, hours-of-service regulations, and ergonomics rules, that could cost the industry billions of dollars. Although these issues will affect all freight transportation providers, the impact will be greater on motor carriers. A number of advances in intermodal should lead to incremental growth in traffic levels: transit-time reductions in many lanes; new products and services; capital investments in intermodal facilities; and elimination of clearance restrictions. Couple these initiatives with innovations in technology and one can quickly see that a solid foundation for future growth is being built.
Outsourcing will also play a significant role in the growth of intermodal in '97. Market-share shifts in the freight transportation industry are largely being driven by shippers' desire to outsource distribution processes. Intermodal marketing companies (IMCs) are evolving into full logistics providers to meet the demand. According to the Intermodal Association of North America IMC Market Activity Report, IMC traffic levels grew at a double-digit rate in '96, outpacing any other freight transportation demand indicator. There's nothing on the horizon to suggest that the pace will slow in '97.
Now for the downside. Last month Federal Reserve chairman Alan Greenspan uttered the phrase "irrational exuberance" and world stock markets tumbled. This leads one to think about the impact a Fed move to raise interest rates would have on the freight transportation industry.
If two words can jolt world stock markets, higher interest rates could send the U.S. economy and those of our major trading partners into a downward spiral.
A slowing of the global economy would also have a dramatic effect on the entire freight transportation industry. Rail mergers, for example, have the potential to slow the growth rate in intermodal since activities surrounding the mergers tend to cause railroads to focus internally. In the West, the two major railroads are busy digesting their new partners, while in the East the merger battle has just begun. Regardless of how things shake out in these arenas, however, management must focus on the product and attack service problems head on if intermodal is to reach its full growth potential.
Despite merger mania and the impact of letting the air out of the balloon, intermodal should continue along a growth path in the new year. A healthy economy, continued investment in the intermodal product, and the logistics revolution will all help this effort.
