Pathway to Normalcy Remains Uncertain

Written by David Nahass, Financial Editor
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FINANCIAL EDGE, RAILWAY AGE DECEMBER 2020 ISSUE (updated): On the final day of what might be the most unusual year in the lives of most Railway Age readers, It’s clear that 2020 was the year of the unexpected. While many people may have thought that a pandemic was not out of the question (in 2019, the U.S. government conducted a pandemic simulation, the “Crimson Contagion,” which predicted more than 500,000 deaths), the U.S. was unprepared for the voracity of the COVID-19 virus and the intensity of the shutdown resulting from its impacts.

Crossing into the holidays, the virus, its impacts and the future were bright, cloudy and unknown. In April, on a Railway Age podcast with Eric Starks (Chairman and CEO) and Todd Tranausky (VP Intermodal and Rail) of FTR Transportation Intelligence, the discussion of what could be expected from the rail economy in 2020 was posited by Railway Age Editor-in-Chief William C. Vantuono. The panel agreed that a realistic best-case hope would be business levels returning to 80% of where they were pre-pandemic.

By the time the pandemic was moving through the U.S., freight levels were down year-over-year roughly 5% in North America. Heading into the holiday season, total freight levels (carload and intermodal) are down just over 8% vs. 2019. Think about it. In spite of the pandemic; a downturn in consumption of refined petroleum, coal and petrochemical products; and a nationwide shutdown that threw retail, consumer services and service industries (think auto, cinema, restaurants, shopping malls) into a downward spiral from which many of them may not recover, the rail economy has rebounded to a loadings level that is within 3% of where it was before the pandemic began!

Before dancing in the streets about rail’s ability to rebound (before public dancing, please don a suitable mask), remember that the pathway to normalcy remains uncertain. Another government stimulus plan arrived just before year-end, but as a result of the failure to act swiftly, consumer spending through the crucial holiday season slowed, and unemployment was expected to increase further.

Counterpoint to the doom and gloom? The FDA approved vaccines; distribution began in mid-December. Estimates were that the first two vaccines could have been in position to inoculate at least 35 million people by year-end (roughly 10% of the U.S. population), but that didn’t happen. Yet, vaccines are the sun on the horizon lighting a pathway leading to the end of the pandemic.

Joe Biden, soon-to-be President of the United States, with Transportation Secretary nominee Pete Buttigieg. NBC News photo

This brings the discussion back to the future for North American rail. The impending change in the White House signals a change in foreign and trade policy. USMCA (United States-Mexico-Canada Agreement) will (and should) survive. Other parts of U.S. trade policy will likely shift dramatically. Stability toward corporate business from the White House is anticipated to be welcome. Corporations seem to be anticipating a softening trade stance, especially toward China. If the Georgia runoffs flip the U.S. Senate to the Democratic Party, higher taxes could result in a slowdown in economic growth.

Support for globalization should ease some minds, but it raises a couple of interesting concerns: One, will the momentum behind near-shoring start to soften as tariffs are removed? Two, how will global trade routes that were adjusted to handle the tariff stance of the U.S. change as the U.S. adjusts its position on tariffs? If Mexico’s role as a business partner for U.S. corporations and manufacturing lives up to its economic promise, near-shoring and the additional value to North American rail will be a boost that could offset the losses of other commodity business.

Kansas City Southern de México

To be frank about it, North American rail needs growth in Mexico, in addition to improvements in trade with China, to keep growing.

The resiliency of the U.S. economy offers hope for strength in 2021. As the pandemic started, many hoped the impact of the pandemic would be a blip rather than a tidal wave with long-term consequences. It is likely to be a little bit of both. The challenges facing North American rail, car owners and commodity shippers will remain in 2021 even as the pandemic fades into the background. PSR, over-supply of railcars, the potential for continued overbuilding, downward pressure on loadings: These ghosts from the pre-pandemic 2020 will come back to regain their footing in 2021. North American rail should prepare now, as the U.S. begins to look toward a hopeful future, to address concerns that have been marginalized more recently.

For you and your families and friends, I wish a safe and healthy holiday season and New Year.

Further insight:

2021 Freight Rail and Equipment Market Outlook, with David Nahass, Jason Seidl and Matt Elkott: RAIL GROUP ON AIR PODCAST