Continued Rise in rail traffic is far from certain

The weekly AAR railroad traffic report is an excellent real-time indicator of the health of the economy. Unfortunately, the volume changes, even when measured over many weeks, are generally so small that they are dismissed by most observers. Moreover, the freight rate increases pushed by the railroads during the past few years have blurred the falling traffic levels behind a screen of rising revenues and profits.

Two years ago, intermodal traffic began to fall and signaled that consumers were in trouble and had cut back spending on disposable goods. Carload traffic also fell and indicated that major industries were beginning to cut output. Intermodal traffic kept falling throughout 2008, but carload traffic showed a slight rebound early in the year due to increased commodity traffic. By the start of the third quarter however, all traffic segments were in free fall and continued to decline until the beginning of the third quarter of 2009. By all accounts, railroad traffic mirrored the overall economy almost identically for the past 2 ½ years, even the unprecedented decline during the first half of this year.

 

Traffic for commodities related to the “cash-for-clunkers program increased in mid-July and has remained relatively stable for the past several weeks. It remains to be seen if auto sales will continue to increase without the government program. There was some improvement in grain shipments, but this traffic is related to exports which are driven more by weather conditions in other parts of the world than US or global economic activity. Traffic levels are still lower than they were during the first quarter and the weekly numbers do not yet signal a rebound.  For chemicals, the increase in traffic is too recent and too small, even by railroad standards, to signal anything yet. As for lumber, there has been no increase in traffic (forest products refer to other stuff in railroad parlance.)

 

Coal is a big worry for overall railroad traffic; it is down and shows no signs of climbing above the levels set during the past winter. Coal and intermodal traffic account for almost half (45%-48%) of all railroad revenue and continued weakness in these two segments does not bode well for increasing profits. These two segments also point to the possibility of an economic reset for the economy, with “greener” and more costly fuels being burned for electricity and less spending in retail establishments by consumers. If this continues, a sluggish rebound in railroad traffic will mirror a sluggish rebound in the overall economy.