Global Economic Forecast

Investment forecasts are driven by models built on expected levels of economic activity. Shifting international dynamics and the impact of the U.S. Administration’s economic policies are driving changes.

While oil prices remained below $50 for most of 2017, recent volatility reminds us there is uncertainty as to their future direction. OPEC has raised its oil supply forecast based on US output growth. The U.S. is expected to be producing a record 10.5 million barrels a day according to preliminary weekly data from the Energy Information Administration (quickly approaching top producer Russia, which pumps about 11 million barrels daily).

Apart from the U.S., global economic growth is open to impacts from U.S. trade policy and sanctions on Russia and Iran. OPEC, along with Russia has been limiting output since January 2017, in order to drain a glut of oil that caused a historic price crash. The decision to exit the Iranian nuclear deal will mean the U.S. will restore wide-ranging sanctions on Iran, OPEC’s third-largest producer.

This and the movement of the U.S. Embassy to Jerusalem are likely to cause turmoil in the Middle East which will act to support crude pricing. Brent crude oil spot prices averaged $72 per barrel in April, an increase from March, and the first time monthly Brent crude has averaged more than $70/barrel since November 2014 (West Texas Intermediate crude is expected to average $5/barrel lower in both 2018 and 2019).

Transportation Investments Remain Promising

The U.S. and World economies are the basis for longer-term growth for both aviation and rail. The FAA baseline forecast for U.S. air carrier passenger growth over the next 20 years averages 1.9%. This baseline forecast assumes economic growth remains solid as both consumer and business spending expand (the recent Tax Cuts and Jobs Act acting as a near-term stimulus for both).

Compared to the baseline, optimistic cases are marked by more favorable business environments and lower fuel prices. Pessimistic cases are characterized by weakened consumer confidence, higher energy pricing, and higher interest rates which lead to a contraction in the commercial real estate and curtailed investment and spending. Will rising oil prices, rising interest rates, and an international shock lead to a stock market that falls sharply and an end to our long-running expansion?

Rail investment

For Rail, volume growth is continuing. Both petroleum and coal car loadings are improving. Total U.S. rail traffic for the first four months of 2018 has risen 3.2% year-over-year, is a shade below where it was in 2015, but otherwise is higher than it’s been in the last 10 years. The number of railcars in storage continues to decrease (but an oversupply remains which continues to impact demand and suppress pricing). The industry reported quarterly orders of 10,000 railcars for only the second time since the second quarter of 2015. While challenging, the North American railcar markets are improving.

Aviation investment

The Aviation industry consolidated with three major mergers in the last five years*. The bankruptcy of Republic Airlines in February 2016 is a reminder that the resulting financial pressures on regional carriers have not abated. But buried in United’s fleet plan for 2018 is the addition of 40 Bombardier CRJ200s and one Embraer ERJ-145 resulting in a net increase of 38 small regional jets in its feeder fleet. With crude oil pricing increasing, will carriers act to remove older less fuel-efficient aircraft? And, how will the U.S. act to engage with the rest of the global economy?

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*The top six, American, Delta, United, Southwest plus Alaska/Virgin and JetBlue account for more than 85% of U.S. airline industry capacity and traffic.
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