JAN-FEB 2018

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CONTACT RTA WEBSITE BECOME A MEMBER BECOME A MEMBER RTA WEBSITE CONTACT Cahaba Pressure Treated Forest Products Eagle Metal Products East Coast Railroad Gross & Janes Co. Hurdle Machine Works Koppers Inc. CROSSTIES • JANUARY/FEBRUARY 2018 10 MARKET OUTLOOK n 2017, the U.S. economy improved along with the global economy. The administration approved an end-of-the- year present to corporations and individuals with a major tax reform package, and the outlook for U.S. and global economic growth brightened further. In the latest earnings calls, the majority of railroads noted improvement in 2017 and expressed optimism for further, yet moderate, improvement in 2018. At the same time, the Federal Reserve Bank raised interest rates three times, with continued interest rate normalization expected this year. Tax cuts caused upward revisions for U.S. GDP growth by 0.3 percent this year as well as 0.3 percent for next year to 2.8 percent and 2.2 percent, respectively (S&P January 2018 forecast). It also prompted IMF revisions for global economic growth of 0.2 percent for each of the next two years to 3.9 percent and 3.8 percent, respectively. Revised U.S. GDP growth is expected due to higher business investments and by con- sumer spending spurred by corporate and individual tax cuts. Job creation is accelerating, with concur- rent pressures on wages a likely result. The improving global economy and the weaker dollar have played a substantial role in the increase of U.S. manufacturing (Fig- ure 1). In addition, higher commodity prices, namely oil, contributed to growth. This can be seen in the Dallas FED's manufacturing outlook index, which is rising (Figure 2). At current prices, and forecasting production of over 10 million barrels per day in 2018, and almost 11 million B/day in 2019, the United States is poised to become the largest crude oil producer in the world. An improving economy, higher manufac- turing activity and more oil production was reflected in higher volume transported by rails. Consequently, Class 1 railroads posted good financial results as noted on quarterly earning calls. The main drivers for the high- er traffic volume for Class 1 were crushed stone, sand and gravel, which rebounded by 13.6 percent, and metallic ores and metals that rose by 7.1 percent. Similarly, for short lines, growth was 22 percent and 4 percent in comparable categories. Transport of coal increased, mainly due to exports, outweighing the decline in domestic energy coal consumption. Class 1s' coal shipments increased 8 percent, and shipments reported by short line railroads by 4 percent. The final takeaway from quarterly calls was that 2018 CapEx will improve marginally over last year; freight volume should increase modestly; increasing oil production brings the demand for fracking Source: EIA, Saint Louis FED, FXStreet Source: Dallas FED Tax Reform & A New Year Opportunities With A Shake & A Stir By RTA's Economic Team 48 50 52 54 56 58 60 0 20 40 60 80 100 120 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 ISM Manufacturing Index Dollar Index and WTI spot price $/B Trade Weighted Dollar Index, ISM Manufacturing Index and WTI Spot Oil Price Trade Weighted Dollar Index Major Currencies Cushing, OK WTI Spot Price FOB (Dollars per Barrel) ISM Manufacturing Index Montly Average -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Dallas FED Manufacturing Outlook Survey Indicies Production Index General business activity Index FIGURE 1 FIGURE 2 I

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