Freight and the Economy

Throughout history, the growth of civilizations has been directly associated with the development of their transportation systems. As demonstrated by ancient Egypt and the Roman Empire, efficient interlinking of distant areas with trade and communications through an efficient transportation system is very much a key in building a great society (Coyle et al, p. 20, 2000). Revolutionary developments in transport were also an essential feature of the rapid growth of the western world in comparison to the rest. This can be ascribed to the fact that the reductions in the cost of carriage enabled specialization and division of labour which made the western economies far more efficient than their international competitors (Cootner, 1964). 

This strong relationship between the economic development and the freight activity suggests the possibility for the freight activity being of relevance for the task of monitoring the economic development. 

Studies documenting the economic relevance of the transportation information can be traced back to the Great Depression. Among the first findings on the topic was published as early as 1946, in which Burn and Mitchell (1946, p. 373) and then later Hultgren (1948), found cyclical movements in railroads coincided with the prosperities and depressions of the economy at large. These findings were then later confirmed by Moore (1961, vol. I, p 48-50), who using updated data through 1958, found that railway freight car loading, while still being coincident at troughs, showed longer leads at peaks after the 1937-1938 recession. Similar cases were also found by scholars at the National Bureau of Economic Research (NBER) who noticed a pervasive influence of transportation on all sectors of the economy and had begun paying attention to the recurrent feature of business cycles from the perspective of transportation. 

However, the response of the U.S. Government to these very promising findings was anything but expected. Rather than encouraging further studies into the usage of transportation in monitoring modern business cycles, they responded by discontinuation of all monthly transportation indicators in the 1970s. 

This discontinuation led to the study of using the freight flows as economic indicators being forgotten and ignored over several decades due to the complete lack of usable data. 

However, this started to change during the 1990s in which multiple ICT systems were introduced to the transportation and logistics industries for the tasks of obtaining, processing and distributing information.  Hence, freight information started to become available in quantities which far surpassed that of the past.

Following the turn of the century, this information was used in the pioneering work of Lahiri, Stekler, Yao and Young (Lahiri et al., 2003) and their development of the Transportation Service Index (TSI). This freight transportation index which was created using trucking tonnage, air revenue ton-miles, rail revenue ton-miles, a waterway tonnage indicator, and pipeline movements of petroleum products and natural gas (Lahiri et al, 2003) was the spark that reignited the study the role of transportation in monitoring modern business cycles.  

In the wake of the TSIF, several studies were published which found relationships between changes in the transport activity and changes in the business conditions, as well as indications of strong feedback relationship between transportation output, input inventories and alternative measure of aggregate economic activities. 

Among the key findings were the following:

• It was found that some sectors, such as the general services sectors, tended to enter growth recessions earlier than the overall economy (Lahiri and Yao, 2004).  

• With reference to the economic recessions of July 1981-December 1982, July 1990-March 1991 and March 2001-November 2001 as defined by the NBER, the TSIF was found to lead the three peaks with a considerable lead time (median 16 months), however the strong cyclical changes in transportation output appear to be more synchronized with growth slowdowns rather than full-fledged recessions of the U.S. economy (Lahiri et al, 2006).

A Commodity Approach

An important aspect of these findings is the fact that they were derived from freight aggregates such as the trucking tonnage, air revenue ton-miles and rail revenue ton-miles.

In other words the findings were derived using the crudest data available; hence, through using more detailed data such as the freight flows on a commodity level should in theory give an even better insight into the state of the economy, as it would also capture the way that transportation adds utility to goods. 

As argued by Douglas North (1958): “The revolutionary developments in transport have been an essential feature of the rapid growth of the western world of the past two centuries. Reduction in the cost of carriage has enabled specialization and division of labour on a national and international basis” (North, 1958)

Among the potential benefits from using more data on the commodity level compared to using aggregated data, is that it would cover one of the key benefits derived from transportation, which is that of geographic specialization, in other words, that it provides each nation, state or city the option of producing products and services for which it is best suited.

Because any one area can’t produce all needed goods, transportation provides the option of sending the goods that may be most efficiently produced at point A to point B in return for different goods efficiently produced at point B (Coyle et al, p. 25, 2000). Another important aspect is that the geographic specialization allows for the complementation of large-scale production, in which effective and efficient transportation networks enables advantages of scale economies, production efficiencies, and cheaper manufacturing facilities. With the reduced costs and the increased reliability of transportation there is a potential increase in the profitability of every link in the value chain. Hence, the raw materials for production can be transported to the manufacturing facilities with the highest willingness to pay, and their finished products then transported to the consumers or producers willing to pay the highest price. One good example on the developments driven by transportation and geographic specialization is given by the recent globalization of the world economy and the rapid onset of vertical specialization. Vertical specialization involves the increasing interconnectedness of production processes in a sequential, vertical trading chain stretching across many countries, with each country specializing in particular stages of a good’s production sequence (Yi, 2001).

The following video gives a good illustration of the increase of vertical specialization:

Together, these cases imply that the flows of commodities between the different geographical areas should be reflective of the economic activities for which they are best suited. Hence, through monitoring the development in these flows one should acquire some insight into the development of the economy as a whole. Furthermore, as it has been found that the transportation activity some sectors tend to enter growth recessions earlier than the overall economy (Lahiri and Yao, 2004)