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The Economy's Wheels are Turning
Subject Transportation Sector
Topic Productivity and Growth
Key Words Economic Indicators, Revenue, Manufacturing Sector, and Demand
News Story

The performance of transportation companies has long been considered an important indicator of future economic growth. The transportation sector has been suffering along with the rest of the economy as a result of the war and the generally sluggish economy. Recently, however, the revenue picture for transportation companies has improved significantly. Companies are reporting an increase in demand across a wide range of industries, from manufacturing and chemicals to retailing and lumber.

United Parcel Service reports an expected increase in domestic shipping volume over the next few months. Part of this increase will be related to the all-important Christmas season, where UPS expects to have the best season since 1999. Other shippers like Yellow Corporation, a leading trucking firm, echo this same scenario. Bill Zollars, chairman of Yellow Corporation says, "We have seen the pickup in shipments for long enough that we believe the recovery is under way. Yellow has experienced an increase in freight demand from manufacturers since July, and this has been followed by increased retail shipments in August and September.

The experience of the transportation companies is supported by economic data from the Federal Reserve, which indicates that manufacturing production has risen in four of the last five months and is up 1.2% since its low in April. As the freight demand increases, many carriers will expand capacity by purchasing more trucks, trains, and aircraft. This spending will in turn spread to the labor market, where more drivers, engineers, dockworkers, and other labor will be needed.

The performance of railroads, trucking, and package delivery is considered an important indicator of where the economy will go in the future. This sector is importance because many of the items carried are resources used in industrial production and for increasing business inventories. The improved revenue picture is leading to greater confidence among freight carriers that they will be able to expand their delivery networks in the coming months. "It's been … three long years since I've had anything upbeat to say about the economy," said Scott Davis, UPS's chief financial officer. But now, the company is experiencing a "pervasive strengthening pretty much throughout our customer base," The experience of the transportation sector indicates that for the first time in three years, broad signs of an economic recovery may possess some staying power.


(Updated November, 2003)

Questions
1.

What kind of economic signal does business desire to increase inventories give?

2. Given the increased demand in the transportation sector, what do you expect to happen to the availability of workers and the pay they receive?
3. Since the transportation industry has been the victim of a sluggish economy, it my have built up some excess capacity. How will this effect future pricing in the industry?
Source Rick Brooks and Daniel Machalaba, "As Volume Pick up, Shippers See Economy Gaining Traction," Wall Street Journal, October 22, 2003

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