The title of the Waterways Council Inc.’s annual symposium held November 14-16 in Chicago, Ill., at the Hotel Sofitel, was “Rivers of Optimism: Catch the Wave.” A distinguished line-up of speakers offered an optimistic take on the state of the river industry, despite the tariff wars and fluctuating barge rates.
Forecaster Bullish On Economic Expansion
The first speaker was Allen Sinai, chief global economist and president of Decision Economics, an economic and financial forecasting firm with locations in New York, Boston and London. His message was simple: “Think growth for the next few years.”
Sinai said the current economic expansion, which will soon become the longest in history, is solidly powered by consumer spending, business investment and government spending. He doesn’t expect it to end for the next couple of years.
Sinai said several times that his forecast goes against conventional economic wisdom and the opinion of the Federal Reserve. But Sinai, a well-known figure in economics and business circles worldwide, is known for forecasts that often defy majority opinion among economists. “The word ‘prosperity’ shocks a lot of people, but that’s where we are,” he said. Sinai was among those who predicted 3 percent growth prior to the election of President Donald Trump, something that few economists were doing; growth is now at about 3.4 percent.
“The growth in the U.S. economy is higher than it has been for years,” he said. The economic expansion, which began in 2010, now stands poised to break the record for the single longest expansion in U.S. history, with 3.5 percent growth and the tightest labor market in generations. He continued to forecast growth and prosperity for the next two years, with only a 5 percent risk of recession before 2021. “Adapting to growth is a complete change of mindset,” said Sinai.
Sinai acknowledged some “worrying numbers,” including weakness in residential construction and volatility in the stock market. But he said none of them could pull down the economy in the near term. Sinai discounted the recent stock-market correction, saying, “Market asset prices go way up and way down; you have to look beyond those swings.” He did acknowledge that if inflation hits 3 percent by 2020, it could cause a slowdown.
“Business fundamental are superb,” said Sinai. “Household finances are as good as they were four to five years ago, and the business sector has the best balance sheet we’ve ever seen.” Sinai cited the tight labor market and higher rates of labor participation; many retirees are moving back into the labor market with part-time jobs, as well as those who had stopped looking after the recession.
Above all, he said, households are both saving and spending. Consumption makes up 69 percent of gross domestic product (GDP). Even though some business are using surging earnings to buy back their stock or reward shareholders through dividends—“That’s what businesses do,” he said—they are also investing in capital improvements.
Sinai said that the huge wave of technological change we are all undergoing is upending a lot of the conventional categories used by economists to capture economic activity. He cited three types of technological change, highlighted by three companies that specialize in each: disruptive change (Amazon), innovative change (Uber), and transformational change (Apple). Because all these changes are so recent, he said, economists don’t yet have enough data to be able to bake their effects into their analyses or forecasts.
Election Was ‘Black Swan’
Sinai said the election of Donald Trump was a “black swan” event, a term adopted by economist for unpredictable, single events that can disrupt trends and averages. “We now have businessmen running the Fed instead of academic types,” said Sinai. “So much of what Trump has done to boost the business cycle is irreversible.” Trump’s business tax cuts, he said, have injected $280 billion into the economy, or about 1.2 percent of GDP. Business earnings are up 24 percent year-over-year—above the predictions of the “conventional wisdom” and well above the Fed’s forecasts, he said. It’s the lag effects of this stimulus that Sinai sees powering prosperity through 2019 and continuing to raise GDP by 3.2 to 3.5 percent. Sinai said he is calling for the S&P Index to hit 3,000 and the Dow Jones Industrial Average to hit 27,000 within the next two or three years.
To a question from the audience about the federal budget deficit, Sinai responded by saying he expects it to be in the 5 to 6 percent of GDP range after three years. While that in itself is “not too worrying” during the present growth, he admitted that it is a “debt bomb” and will immediately cause problems when growth slows.
Sinai believes that there is room in the U.S. budget for more infrastructure spending over the next few years. He said he thinks an infrastructure bill totaling at least $1 trillion over 10 years (as Trump has promised) will be passed, funded by the deficit.
In response to questions about trade and tariffs, Sinai said that the trade agreements the Trump administration signed with Canada and Mexico were “not all that different from NAFTA.” He noted what others have, that it’s the areas that voted for Trump where farming and manufacturing are located that have been worst hit by the tariffs. He admitted that the middle class has been largely left out of the tax cuts but said middle-class household finances are in “great shape,” with lower debt, and a higher savings rate in the middle 60s, “which we haven’t seen in decades.”
Negative trade news like the tariff wars, he said, could affect only a half percent of the growth he is predicting at most. Interestingly, Sinai, who said that like most economists he had once preached the benefits of free trade, now said, “There is no such thing as free trade; fair trade is better.”
After a break, a post-election roundup was provided by Roger Bernard, a policy analyst for Informa Economics and former Washington editor of Farm Journal. Bernard noted that the U.S. House now has almost 100 new members, most of whom have to be educated on farm and waterways issues. Bernard said he thinks there is a good possibility of the lame duck Congress passing a comprehensive farm bill before the holidays. Some federal agencies still don’t have FY2019 funding in place, and that could be accomplished by another “mini-bus” appropriations bill.
Bernard said additional money for farms and flood control will likely come in pending disaster aid bills, since “Congress never met a disaster it didn’t like.”
Bernard believes there is more than a 50 percent chance that the House will flip back to GOP control in the 2020 elections.
Trust Fund Issues
R.D. James, assistant secretary for the Army-civil works, who was confirmed in January, spoke next, after specifying that he could not speak about the Corps of Engineers’ Work Plan, which is under development. One of his current concerns, he said, is Missouri River navigation. “My desire is to have full and open navigation on the Missouri River from Sioux City [Iowa] to St. Louis,” he said.
When asked if the Upper Mississippi River would receive Navigation and Ecosystem Sustainability (NESP) funding, James replied, “I’m more hopeful now than I was two months ago. I felt that program is under-supported in Washington, and I have been in several discussions about that recently.”
James said it was only after he assumed his current duties that he realized that the Inland Waterways Trust Fund (IWTF) is not really a dedicated, sequestered fund; that is, the money from the taxes of towboat diesel fuel goes into general federal revenues, from where the administration often fails, through reluctance or bureaucratic inertia, to dedicate it to the purposes for which it is intended. “There’s nothing right about either trust fund,” he said. “I would rewrite that legislation if they would let me. Inland and coastal people should be storming Washington on trust fund issues.” Regarding the trust funds, he said, “I haven’t gotten to the bottom of it, but I haven’t given up either.”
James drew a laugh when a questioner noted that the president’s budget originally had only $35 million going toward Olmsted Locks and Dam from the IWTF (that amount was significantly boosted by Congress) and asked, “Who in the administration supported that?” James immediately replied, “You’re not looking at him!”
New Trade Developments
“The goal of my entire team is to unleash the competitiveness of American farmers, ranchers and the agriculture industry.” That was the message that Stephen Censky, deputy secretary of agriculture, brought to the November 15 WCI luncheon, Censky said American infrastructure is “horribly outdated,” and the needs of the transportation system that has “kept U.S. farmers competitive” are dragging down the economy.
Before being sworn in October 22, 2017, as the No. 2 man at the U.S. Department of Agriculture responsible for its day-to-day operations, Censky spent 23 years at the American Soybean Association, 21 of those years as its CEO.
In a meeting with The Waterways Journal before giving the lunch address, Censky touted the administration’s trade agreements with Canada and Mexico as a “big win” for farmers, especially the agreement with Canada, which removed onerous protectionist restrictions against U.S. wheat and dairy imports. For instance, he said. Canada had long had rules requiring that all U.S. wheat imports be rated “feed grade,” no matter the quality of the wheat, while Canadian wheat was free to get whatever price it could in the U.S. based on quality. These rules were repealed in the new agreements, as well as restrictions on daily imports long campaigned against by U.S. dairy farmers. He said poultry and egg farmers got more expanded access to Canada’s markets under the new agreement.
Censky acknowledged that the Chinese tariffs against U.S. soybeans have had a big impact. The soybean tariffs by China—the world’s largest importer of soybeans—have left U.S. farmers with a billion excess tons of soybeans. Censky acknowledged that many farmers might decide to plant other crops if the tariff situation is not resolved soon. “The ball will be in China’s court” at the upcoming G20 trade meetings in Argentina, to be held November 30-December 1, at which President Donald Trump is expected to have one-one-one meetings with Chinese leader President Xi Jinping.
Censky said that the Trump administration has dedicated about $12 billion to aid farmers hurt by the tariff wars. Some of that money was set aside to buy soy stocks at $1.65 a bushel; about half that money had been spent since August, with the other half held pending tariff talks. About $1.23 billion was used to buy other assorted crops like pistachio nuts and table grapes for distribution to food banks. And about $200 million was used to expand market development programs, finding new buyers for U.S. ag products.
On waterways, Censky said the USDA’s role is to analyze the impacts of transportation on ag product movements and to advocate internally for U.S. waterways. In his lunch talk, he cited USDA. figures showing that soy movements by barge were down 20 percent by early November, not enough to offset a 5 percent increase in corn movements. “We are strong believers that we need a strong infrastructure system, and that has to include a strong inland waterway system,” he said. “Barging is still the most efficient way to get bulk exports to market.”
Barge Market And Commodity Panel
After lunch, Ken Eriksen, senior vice president at Informa Economics IEG and the head of its client advisory and development and energy and transportation groups, gave a presentation on the U.S. barge market, followed by a panel discussion of commodity movement.
Eriksen recently returned from speaking in Shanghai, China, where he noted that Chinese millennials have become more interested in “foodie” restaurants and the cold-chain operations for ag commodities are growing all over Asia.
Eriksen noted that Doyle Trading Consultants is predicting continued growth in U.S. exports of coal, petcoke and steel through 2020.
Still Too Many Open Barges
Eriksen said that last year saw some shrinkage of the U.S. inland barge fleet, which now stands at about 18,000 tank and 20,000 dry open hopper barges. The average age of barges went down, although some aging opens are being kept going by coal exports.
Eriksen said the Brazilian soy crop is not expanding as much as had been anticipated. Ethanol movements on the waterways have been “running strong,” he said, and could triple within a few years.
However, he said he didn’t expect much growth in barge freight rates over the next year despite increasing demand for some commodities. Coal exports won’t be “solid” in the long term, he said, despite short-term opportunities in Turkey and Australia. “There are still too many open barges,” he said. “We need retirements and replacements.”
High Water, Harsh Winter
Ben Doane, head of barge freight trading at CSH Global Grain Marketing, noted that the typical tow size of Cairo-to-Gulf was scaled back this year from 35 barges to 25, due to high water. Other challenges included lock and dam issues, higher fuel prices and a harsh winter from which the industry “never really recovered.”
With those factors, plus strong export demand, barge rates climbed upward during the spring and held through most of the summer until being disrupted by Chinese tariffs. Stronger corn yields and demand meant corn movements were up. The retaliatory Chinese tariffs against American soybeans left the U.S. with a “carryover” of about 1 billion tons of beans, or about 25 percent of total production. The cheaper price of U.S. soybeans due to oversupply and lack of competition from China stimulated demand from some other buyers in Europe and the Middle East. Doane said that in response, U.S. rail carriers were shifting Pacific Northwest beans to St. Louis by rail, from where they were barged to the Gulf.
Coal Exports Looking Up
Betsy Monseu, CEO of the American Coal Council (ACC), a nonprofit trade association, gave a mostly positive presentation on U.S. coal exports. Just a few years ago, the top three U.S. coal producers were in Chapter 11 proceedings after 637 coal-burning electricity generating plants in 543 states—40 percent of 2010 power sector—closed in a short time. But Monseu said U.S. producers have rationalized production and finding export markets, although access to capital remains “difficult and expensive” for them. From 2013 to 2018, she said, barged coal shipments declined from 128 million tons to 84 million tons.
But U.S. exports of both thermal and metallurgical coal are rising. They will reach a five-year high in 2018, with good prospects for 2019 as well. In 2018, a total of 15 percent of U.S. production will be exported—a historic high.
On water infrastructure, said Monseu, “our messaging reinforces yours.” Monseu is an appointed member of the National Coal Council, a federal policy advisory group to the Secretary of Energy. In October, it produced two reports on coal at the request of Energy Secretary Rick Perry. One of the reports recommended streamlined funding for U.S. river system infrastructure.
Spellmon Talks Reform
On November 16, Maj. Gen Scott Spellmon, deputy commanding general for civil and emergency operations at the Corps, spoke on the Corps recent appropriations and its efforts to reform how it delivers projects. He noted that for the first time in many years, the Corps began FY2019 by operating with appropriations (totaling just under $7 billion) instead of a continuing resolution.
The Corps “has long recognized that we need to change how projects are delivered,” he said. Spellmon said he himself had experienced how the Corps has become “too risk-averse,” layering projects with approvals and permits. But with what he said was “great support” from R.D. James, the Corps has recently delegated 15 specific decisions from headquarters back to division level; the delegating initiative is called “power down.”
But in the question period, Spellmon admitted that the Corps is behind where he would like it to be in its streamlining efforts.
Illinois Lock Closures
One of the panels most closely attended to by guests at the Waterways Symposium was the November 16 panel in upcoming closures of locks on the Illinois Waterway to perform urgently needed major repairs and upgrades. Panel members include Pat Chambers, deputy chief of operations for the Mississippi Valley Division; Bill Chapman, chief of operations and of the regulatory division of the Civil Works Directorate; Tom Heinold, who serves at the chief of operations division for the Rock Island Engineer District; and Marty Hettel, chairman of the Inland Waterways Users Board (IWUB), who hosted and introduced the panel.
Hettel began by noting the that the Corps originally planned to close one lock a year on the Illinois River for six years; that schedule would have catastrophically disrupted commercial navigation on the system, perhaps for good. IWUB members urged the Corps to consolidate as many lock closures together as possible to minimize disruptions.
Heinold noted that the Illinois Waterway stays open year-round. “We’re working with stakeholders to consolidate as many closures as possible,” he said. Heinold noted that within the Corps, “major maintenance” is a different funding category from “major rehab.”
The schedule now is to close two locks in 120-day closure 2020 and two in 2023; the gap was deliberately chosen to minimize disruptions to the navigation industry, Heinold said. Scheduled closures affect many businesses, but they are a necessary evil and much preferable to unscheduled closures. In response to a question from Hettel, Pat Chambers said the closures were originally supposed to be for 150 days, but pre-cast panels will shorten the closure times.
On November 13, the district awarded a $117 million contract to AECOM Energy & Construction Inc. for the work at LaGrange Lock and Dam. Major items include precast concrete panels, integrated wall armor, utility trench replacement, and protective concrete piers. The mechanical systems will be rehabbed including hydraulic power units, miter gate rotary actuators, and tainter gate submersible cylinders. A bubble system will be replaced.
Starved Rock Locks and Dam will be getting new, heavier miter gates and new anchorages for them. In response to stakeholder suggestions, the Inland Navigation Design Center has designed standardized gates for four locks on the Illinois Waterways, with interchangeable bulkheads.
Caption for top photo: R.D. James and Peter Stephaich. (Photo by Nelson Spencer Jr.)