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Transportation and the Economy

The business of moving freight is a major expense for an individual company and is essential for flowing product through the supply chain. In total, transportation is a significant industry in every developed economy. Each year, the CSCMP conducts an analysis of logistics costs in the United States. Table 1-1 illustrates the expenditures directed toward various logistics activities in the United States in 2012. Of the $1.331 trillion sum, $836 billion (or 62.8 percent of total logistics cost) was spent on transportation. This amount greatly exceeds the expenses dedicated to other logistics activities. Logistics costs amount to 8.5 percent of the nation’s gross domestic product (GDP), and transportation alone represents 5.4 percent of the U.S. GDP. In other words, just over 5 cents of every dollar spent in the United States goes toward transportation. Total logistics costs in Europe run the range of 12 percent. In less developed countries, the share of the GDP directed toward transportation can be even greater because it costs more to move products when infrastructure is lacking or not sufficiently maintained. Total logistics costs in China are approximately 21 percent of the GDP.

Table 1-1 U.S. Logistics Cost, 2012

Cost Category

$ Billions

% of Total

Inventory-Carrying Cost

305

22.9

Transportation

836

62.8

Warehousing

130

9.8

Shipper-Related Costs

10

0.8

Logistics Administration

51

3.8

Total Logistics Cost

1,331

100

Source: Rosalyn Wilson (2013), The 24th Annual State of Logistics Report: Is This the New Normal? CSCMP.

The ease or difficulty with which companies can transport goods within a country can affect their competitiveness in global trade. When transporting goods is easy and costs are relatively low, exporters can efficiently ship their merchandise to export locations and on to international markets. One such example is that of U.S. farmers in the central states of Illinois, Indiana, Iowa, Nebraska, and Ohio. Farmers in these states compete with farmers in the Pampas region of Argentina to sell grains, such as corn and soybeans, in markets abroad. The growing conditions in Argentina are considered advantageous to those in the United States, allowing farmers to achieve greater yields and enjoy lower costs of production. However, by virtue of using the highly efficient U.S. railroads and river barges to reach the export port, the American farmer enjoys savings in transit time and transportation expense that can offset the inherent advantages in production yield and costs enjoyed by the Argentinian farmer. The more difficult it is to move product over a distance, the greater the friction of distance. With greater friction come higher costs. In the grain-shipping example, the farmer in Argentina faces greater friction of distance (and higher costs) in transporting the grains from the farm to the export port in Buenos Aires. Despite the longer distance, there is less friction for the American farmer, who can efficiently ship the grains via railroad and barge.

Table 1-2 contains statistics of the transportation infrastructure in the United States. With more than 4 million miles of public roadways, enough to circle the globe 157 times, virtually every business and household in the nation enjoys the benefits of easy roadway access. The Interstate Highway System (originally called the National System of Interstate and Defense Highways) provides efficient connectivity among almost every large and medium-size city in the nation. High-speed delivery is supported with a network of more than 5,000 public airports, as well as another 14,339 for private use and 271 for military purposes. Freight rail transportation occurs over 161,000 miles, most of which is operated by major Class I rail operators. The continental United States is also endowed with various forms of navigable waterways, including rivers, Great Lakes, and ocean shipping on three coasts. Finally, pipelines, an often overlooked mode of transportation, distribute large quantities of fluid material (gas and liquids) over long distances throughout the nation. In sum, this extensive network of transportation assets supports commerce among businesses and consumers within the United States, and also helps to support export and import activity with businesses abroad.

Table 1-2 U.S. Transportation Infrastructure

Miles of Public Roadways

4,059,339

Miles of Interstate Highway System

47,011

Miles of National Highway System

117,084

Miles, Other Roads

3,895,244

Number of Public Airports

5,172

Miles of Railroad

161,195

Miles of Navigable Waterways

25,320

Number of Commercial Ocean Facilities

5,588

Miles of Pipelines

1,735,237

Miles, Hazardous Liquid Pipelines

177,631

Miles, Gas Transmission and Gathering

324,606

Miles, Gas Distribution

1,233,000

Source: These data are presented in the 2013 Pocket Guide to Transportation, Bureau of Transportation Statistics, U.S. Department of Transportation, compiled from various sources.

A strong argument can be made that the economic health of a nation is linked to the health of its transportation infrastructure. This argument works in two ways. First, an extensive infrastructure supports economic growth. Second, economic strength supports investment in infrastructure. A modern case study that illustrates the strong association between infrastructure development and economic growth is that of China during the past two decades.

Transportation supports an economy not only by connecting people and places, but also through the many people it employs. Table 1-3 presents employment data for the United States in 2011. Nearly 4.3 million people were employed in the provision of for-hire transportation services, with almost 1.3 million in the trucking industry alone. Another 5.4 million were employed in transportation-related services and construction. Finally, almost 1.7 million people were employed in the production of transportation equipment in the United States. Combined, this totals 11.4 million transportation-related private sector jobs, or almost 9 percent of the total U.S. labor force.

Table 1-3 U.S. Transportation-Related Employment, 2011

For-hire transport and warehousing

4,292

Air

456

Water

63

Railroad

229

Transit/Ground Passenger Transportation

436

Pipeline

43

Trucking

1,299

Support Activities

564

Scenic/Sightseeing Transportation

29

Couriers/Messengers

529

Warehousing/Storage

646

Related Services and Construction

5,405

Transportation-Related Manufacturing

1,684

Source: 2013 Pocket Guide to Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics, U.S. Department of Transportation, Washington, D.C.

Transportation and logistics are regarded as “derived market” activities. That is, demand for transportation and logistics service is derived from the demand of other goods and services in the economy. When a manufacturer seeks supplies from distant locations, there is demand for transportation. Similarly, when consumers have demand for goods produced elsewhere, transportation is demanded. So demand for transportation tends to closely follow the economic activity in a region. For this reason, economists and market analysts pay close attention to transportation shipment data—they present an accurate, timely picture of economic vitality for a region or nation. Rail and trucking volume reflect the economic activity of a nation, and ocean and air transportation statistics illustrate trade levels among nations.

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