Coronavirus Impacts on the U.S. Economy
Goldman Sachs recently predicted that the GDP is now expected to fall 39 percent in the current quarter and 6.9 percent for the year. It also predicted that the unemployment rate will rise to 25 percent at its peak. The latest jobs report showed the loss of almost 2.4 million jobs bringing the nine-week total to 38 million.
Read about the intricacies of a coronavirus-induced recession, here.
Also, manufacturing fell 26 percent in April in the U.S. Retail sales fell 16.4 percent, the largest drop on record by far. In fact, the prior record was 8.3 percent in March.
Dr. Anthony Fauci warned that reopening too soon will result in “needless suffering and death.” He stated proper precautions need to be taken or there could be a surge of cases in the fall. Goldman Sachs similarly warned that opening too soon could result in worse economic ramifications due to a possible resurgence in cases.
For shippers, the health and success of the economy directly correlate to the movement of goods across modes. The rail industry has already felt the effects of the coronavirus and will need to continue to pay attention throughout 2020.
Coronavirus Impacts on Rail Freight in the U.S.
The rail industry is usually an excellent barometer for how the U.S. economy is doing in good times and bad times. The effect of the pandemic on the economy is certainly reflected in recent U.S. rail traffic numbers. These numbers have plummeted in comparison to 2019.
In a recent report from the Association of American Railroads about U.S. rail traffic for the week 20 of 2020 (May 10-16, 2020), total carloads decreased by 30.2 percent from 2019 volumes. Total intermodal units fell 14.0 percent from 2019; coal plummeted 44.0 percent, and motor vehicles all but stopped moving, falling 83.3 percent. Total traffic is down 22% from 2019.
Railroads’ Reaction to Coronavirus
These diminished rail traffic numbers have had a great impact on railroads’ bottom lines. As a result of Covid-19, the Class I railroads have all withdrawn their guidance to Wall Street for 2020 and are trying to determine what this economy has in store for them for the remainder of the year and afterward.
The railroads are also downsizing in light of these huge traffic losses, cutting headcount, closing yards and other facilities, and idling locomotives. In addition, railroads are reevaluating their capital spend for this year because of the downturn. The railroads state that they are keeping these locomotives and employees ready to return to work once the economy bounces back.
Watch for Rail Service Issues as the Economy Improves
This rationalization of the entire rail industry over the last two months should be carefully watched as the economy begins to ramp back up. Some economists assert that we are near the bottom of a v-shaped trough, indicating a quick economic comeback sometime in the near future. With locomotives parked and employees furloughed, the railroads will need to be ready to bring their operations back to handle more traffic as the economy improves. If it does improve through this v-shaped path, the railroads may not be able to handle the increase in business despite their attempts to be ready.
In the past, many of the major service issues in the rail industry have arisen due to the railroads’ inability to right size after laying off employees and rationalizing assets. If the economy comes back quickly, railroads could have service issues which could result in impacts to their shippers. Service issues of this nature in the past have resulted in severe delays in the delivery of shippers’ rail cars, causing their plants to shut down or to slow operations because of the inability to obtain commodities for production.
The Surface Transportation Board has been in constant contact with the railroads since the Covid-19 crisis began to make sure railroads are prepared for any surges or other issues. This oversight has been helpful in the past as the railroads generally do not want to upset their regulator. Consequently, railroads are trying to be responsive to the STB’s inquiries.
Financial Impact of Coronavirus on Railroads
It is hard to tell exactly how much financial impact these downturns in volumes will have on the rail industry despite its attempt to downsize. Clearly, the railroads’ revenues will decrease. Operating ratios also will be difficult to lower in this climate.
Shippers should watch carefully to see if railroads are willing to lower their rates because of this massive change in freight traffic. However, Union Pacific (UP) stated in its quarterly earnings report that it anticipates pricing gains in excess of inflation dollars. I have talked to several shippers about their rate negotiations with Class I railroads and some are still seeking increases while others have offered decreases or the same rate.
It will be interesting to see if railroads will decrease their rates more aggressively if trucks and intermodal rates stay extremely low. Railroads may begin to lose even more traffic on routes that are competitive with these modes if they do not adjust.
Shippers Should Remain Alert to the Changing Transportation Landscape
Shippers should remain vigilant about their service from the railroads as the economy makes its comeback. Shippers should also watch rail rates to see if truckload rates are more favorable and make more sense in this changing market. In all, shippers and carriers across transportation modes will need to pay close attention to the changing market conditions acting on their freight flows as we all navigate these uncharted waters.