The annual inflation rate in the US accelerated to 9.1% in June, the highest since November of 1981, up from 8.6% in May and above market forecasts of 8.8%. Energy prices rose 41.6%, the most since April 1980, boosted by gasoline (59.9%, the largest increase since March 1980), fuel oil (98.5%), electricity (13.7%, the largest increase since April 2006), and natural gas (38.4%, the largest increase since October 2005). Food costs surged 10.4%, the most since February 1981, with food at home jumping 12.2%, the most since April 1979. Prices also increased significantly for housing (5.6%, the most since February 1991), new vehicles (11.4%), and airline fares (34.1%)[1].

The U.S. economy has stalled in the first half of 2022. The Commerce Department reported 2nd Quarter GDP contracted .9% following a 1st Quarter contraction of 1.6%. Yet U.S. labor markets remain strong, consumers appear to be in good financial shape, and the U.S. Dollar is near its highest level in two decades. Post-Covid demand recovery has driven 2ⁿᵈ Quarter profits in both the Aero and Rail transport sectors. American posted 2nd Quarter profits of $476 million, United $329 million, Delta $735 Million, Union Pacific $1.8 billion, CSX $1.2 Billion, Norfolk Southern $819 million, and Kansas City Southern $194 million. Flights are full and domestic Aero leisure travel has surpassed 2019 levels. But rail carload traffic is down 0.1% in the first half of 2022 (only 2020 had fewer first-half carloads): coal down 2.2%, grain down 7.9% and petroleum products, down 10.9%. And operational challenges continue for Commercial Air carriers and Class One Railroads as they struggle to return to pre-Covid service levels. Flights are being canceled and railcar loadings are being limited to alleviate congestion and improve network reliability. Both the Class Ones and Commercial Air carriers are dealing with labor issues. Sourcing pilots is a key challenge (Oliver Wyman forecasts a 29,000-pilot shortage by 2032). Since 2020 the nation’s freight rail unions have been negotiating to secure new labor contracts. The mechanics of the 1926 Railway Labor Act allow a national rail strike as soon as mid-September unless Congress acts.

Aero and Rail equipment markets are active. Boeing left the Farnborough Air Show with more firm orders than Airbus. Delta placed an order for 100 737 MAX 10 aircraft and committed to an additional 20 A220-300s. Airbus went to the Airshow well ahead with 442 gross orders through the end of June compared to Boeing’s 286 gross orders. The Class Ones continue to deal with rail network congestion. It’s driving the rail equipment secondary market. Railcar demand for most car types is robust and lease renewal rates continue to improve[2]. With new equipment becoming more expensive and network congestion driving demand, midlife rail transportation equipment values have increased, and income streams are up.

Since the end of World War II, a recession has never been declared without a loss of employment. With elevated prices the Federal Reserve is committed to restoring price stability. We should expect the Fed to continue to raise its target interest rate to between 3.5% and 3.75% or more if additional government spending is approved[3]. Current mixed economic signals demand transportation investment underwriting be disciplined and based on deep industry experience. No investor can be knowledgeable about all industries and equipment types.

Real assets provide diversification, inflation protection and yield. Evaluating alternatives in this changing market environment? Call RESIDCO.

Glenn P Davis, 312-635-3161
davis@residco.com

[1] Trading Economics report via U.S. Bureau of Labor Statistics
[2] Trinity Industries 2nd Quarter Report
[3] The Inflation Reduction Act

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