with Walter Kemmsies
Despite the severe winter weather, data shows that the U.S. economy is indeed improving, which is why the Federal Reserve feels it can reduce its efforts to keep interest rates down.
The Fed’s focus has been on the interest rate for U.S. Treasury 10-year maturity bonds, because it is the benchmark on which many corporate and consumer loans are based. The Fed purchased large quantities of Treasury bonds to drive their price up and therefore their interest rate down. This drove down interest rates on mortgages and car loans, spurring demand and therefore production. Employment in the United States, which is a policy focus of the Fed, has almost returned to its pre-recession level. Thus the Fed has determined there’s less need to keep interest rates at historically low levels. As interest rates rise, freight flows and investment activity in the industry will change. This month, the focus is on the impact of rising interest rates on the freight movement industry. For the May issue, impacts on investment activity will be discussed.
Impacts of freight flow patterns.
Currency tends to strengthen as the economy strengthens and this is reflected in rising interest rates. Recently, the U.S. dollar has weakened relative to European currencies and strengthened against emerging market currencies. Europe’s economies are still suffering from the financial crisis, but there are signs of recovery and interest rates are higher there. Emerging market currencies weakened because substantial sums were borrowed to invest in infrastructure. Those loans are mostly denominated in U.S. dollars and rising U.S. interest rates makes it more difficult for them to be repaid, especially since emerging market exports have slowed.
U.S. Federal Reserve, National Bureau of Economic Research, Moffatt & Nichol.
Some consequences of these trends for the U.S. freight movement industry are:
- Imported goods become cheaper and exported goods become more expensive. In the near-term this indicates that U.S. imports will grow faster than exports. Pricing pressures will be felt by domestic farmers, processors, railroads and bulk-handling entities.
- Since 2008, movement of goods produced and consumed domestically has grown faster than that driven by international trade. This should reverse in the near-term.
- As interest rates decreased, the cost of holding inventory also decreased. International shipments shifted from air freight to sea. As interest rates rise some of those shipments could shift back to air freight. However, it is not clear that all of it will because sea freight has become more reliable, offsetting some of the advantages of tracked air freight. But all freight modes will experience greater demand for faster shipping times with less time spent on the docks, in warehouses, or in transit.
The effect of these trends will be to demand greater efficiency from each and every link in the overall supply chain. Farmers, manufacturers, marine terminals, railroads, truckers, warehouses, intermodal facilities, and bulk-handling facilities will all experience direct demands for faster and/or cheaper goods and services.
These trends have prompted many segments of freight movement to invest in capacity expansion, and that prompts the question: could it be that the recent travails of the ocean carriers are about to be experienced by other links in the supply chain?
With all of these pressures it is not surprising that experienced freight planners are in high demand these days. The time to get access to them is now, particularly before committing to significant supply chain contracts. Anticipating change is the hallmark of the global freight industry.
Kemmsies is chief economist at Moffatt & Nichol, an infrastructure engineering firm. He can be reached at (212) 768-7454 or by email