The Economy’s Recent State
There is plenty of good news for the U.S. economy. The Fed maintains the economy is growing at a “solid rate” and inflation is near its 2% target. GDP growth for 2019 is forecast to remain over 2%. As the Fed pauses interest rate hikes, the era of central bank intervention in the markets is coming to an end. The current economic expansion now is expected to continue past June, becoming the longest expansionary period on record. Yet consumer confidence dropped in January for the third consecutive month. Are we coming to the end of the cycle, or was it simply the negative politics of the recent partial government shutdown?
Companies in the U.S. are reporting stronger results than those with overseas exposure. U.S. Railroads certainly don’t see a slowdown. Fourth-quarter 2018 freight car orders, deliveries, and backlogs present a long term sustainable market for the rail car builders. At 80,233 railcars, backlogs are at their highest level since the 2nd quarter of 2016 and new order positions extend out to 2020. While rail traffic for the full year 2018 was mixed, fundamentals support continuing traffic growth. Shipments of grain, petroleum products, intermodal, and the general merchandise business are offsetting worries over trade, politics, and a volatile stock market. Improvements in operating ratios continue as the Class Ones embrace precision scheduled railroading which focuses on uniform and scheduled train operations that minimize required assets and cost. Add a shortage of over the road truck capacity which has driven up truck rates, and the result is more traffic diverted to the railways, allowing higher carload pricing.
Similarly, since 2008 the global aviation industry has enjoyed a long period of expansion. With more airline passengers globally, the demand for aircraft has surged. Boeing and Airbus have seven to ten-year backlogs. Despite arguments over whether we have passed the peak of the cycle, aircraft investment remains driven by changes in GDP. And global air traffic in RPK’s (revenue passenger kilometers) continues to grow at rates in excess of the forecast long-term average of 5%. This is fueled by the growth of the global middle class – particularly in Asia. In addition, load factors are at record levels. Even with current jet fuel pricing, air travel remains a cyclical industry facing cost pressures due to a long-term shortage of pilots and mechanics. As builders introduce new aircraft models, older units appear to be depreciating at a faster pace. Yet delivery delays for new aircraft combined with lower fuel pricing and rising load factors have increased ‘midlife’ aircraft values and the level of trading activity in secondary markets.
Looking at the Future
Where are we in the business cycle? Macroeconomic factors impacting global economic growth include trade, geopolitical uncertainties, and individual country fiscal and monetary action. Growth and trade policy are deeply integrated. For example, if the President and Chinese leader Xi Jinping reach an understanding with respect to trade and tariffs the result would be immediate and favorable. Equipment leasing generates streams of cash, and for transportation equipment investors, the key lies in assessing the needs of their user base. Whatever your investment horizon, get the odds on your side by leveraging insider knowledge of transportation user needs, and future equipment values. The first step is to decide where you are, then decide how you will deal with the future. Paying heed to the cycle pays off.
Headwinds or tailwinds? For answers, call RESIDCO.
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