Labor and Equipment Demand
Eliminating hump yards and running fewer, longer, ‘scheduled’ trains, the Class One’s are continuing to implement Precision Scheduled Railroading (“PSR”). It’s transforming rail networks, reducing the need for labor and equipment.
The Union Pacific is planning to reduce its workforce by eliminating 3,000 workers this year (after reducing its staff by 11% in 2019). As train speeds increase, the need for rail equipment decreases. It’s estimated that for every one-mile increase in average freight train speed and additional 50,000, additional railcars will be moved to storage. Of a fleet of 1.6 Million railcars, 25% were in storage this January. And train speeds are increasing due to PSR, lingering trade tensions, and to lower freight volumes caused by our slowing manufacturing economy*. Going forward with larger capacity and new cars being delivered, fewer cars will be needed. Added to this, the Rails are losing market share as shippers move product to truck to meet just-in-time inventory requirements.
The Election Effect
Over the years, car ownership has changed dramatically. In 1962 the railroads owned 90% of the freight car fleet. Today, 75% is privately owned. The oversupply of railcars and locomotive power caused by PSR and lower freight volume is acting to reduce market values of existing equipment and lease rates at renewal. The current low-interest-rate environment is depressing lease rate factors available for new equipment. Uncertainty over the fall election and direction of international events (both in the Middle East and Asia) are working to hold the business investment flat. As a result, new railcar deliveries for 2020 are expected to trend down.
Given the election year, Trump signed a “phase one” trade deal with China this January 15th. It provides a measure of relief for rail shippers. China agreed to make purchases of $200 billion worth of U.S. goods over a two-year period, doubling its agricultural purchases to $40 billion. Whether China will honor this agreement (which includes ending its practice of forcing foreign companies to transfer technology to Chinese companies as a condition for access to the Chinese market) is an open question.
The agreement won’t fix everything. There will be a continuing lack of cooperation over technology, national security, military, and political ideologies. These are significant and continuing issues. As the U.S. and China pursue their own national and economic interests, the conflict will continue. A degree of economic decoupling is likely and the future of freight traffic between the two countries remains unanswered. At stake are a stronger economy and global influence.
Globalism, which fostered complex supply chains spanning multiple borders, is retreating. The U.S. has become unilateralist and is rewriting trade rules to prioritize its interests while shunning trade blocs. Bilateral deals have been completed with Canada, Mexico, now China, and soon with Britain, as it has left the E.U. The economic impact of the coronavirus in China is unknown, but airlines are suspending flights and businesses are shutting down operations there.
Investment Risk Planning
As fiscal stimulus fades and global growth slows, U.S. GDP growth is expected to remain at 2%. Even though we’re in the longest bull market in history, overall uncertainty has not been reduced. Tariffs have led to a decline in business investment. While change is certain, how we react to events, preplan for them, and manage through them is within our control.
Struggling to price investment risk and looking for answers? Call RESIDCO.
*The U.S. manufacturing sector contracted for five straight months through December, the Institute for Supply Management.
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