Rail traffic: The economic indicator that's not improving
Aug 5th 2009 11:00AM
Updated Dec 4th 2009 1:39PM
If you're skeptical of the economic data that pundits tout as a sign the economy is starting to recover, you're not alone. In fact, you might have one very good reason to believe that economic activity is still tepid and is not showing signs of improvement. Stock research house Zacks points out that rail traffic, a direct indicator of economic activity, hasn't recovered at all.
Rail shipments in the last four weeks are down 18.6 percent compared to 2008, which is comparable to the 18.8 percent year-to-date decline versus the same period in 2008.
Not only has a bounce eluded rail carriers, but the outlook doesn't appear to be much better. After reporting earnings in July, major railway operator CSX Corp. (CSX) said on its conference call that, "Based on the current economic forecast we'd expect a double digit decline in our volume will continue yet at a slightly lesser rate in the third quarter . . . our third quarter revenue outlook is unfavorable in eight of our 10 markets, flat in food and consumer and favorable in agricultural products."
An analysis of commodity-specific transportation data from Railfax reveals that only auto shipments have seen a greater improvement than grain shipments in terms of the trailing four weeks, compared to year-to-date numbers. The auto numbers were likely helped by the "cash-for-clunkers program" and inventory restocking, judging from the relatively sharp rise in recent activity that left last week's shipments down "only" 32.2 percent from 2008. On a year-to-date basis, autos have still suffered the worst fate in terms of traffic declines.
Two segments that have been performing worse in the last four weeks than they have overall year-to-date are coal and intermodal transports. The drop in coal is due to lower electricity generation -- another sign of poor economic activity -- and the replacement of coal with natural gas at some power plants, as natural gas prices are at a multi-year low. Intermodal deliveries are carried long distances by rail, and then have their final delivery made by freight trucks. Zacks suggests, "it is possible that the rails are losing share to the truckers," though regardless, there is simply less business to go around.
Another indicator offered by Railfax suggests that talk of a recovery for residential and commercial construction is premature. Carloads of crushed stone and lumber, both important inputs for new buildings, are flat-to-down in the last three months. When viewed holistically, rail traffic data suggests that, although the rapid drop in the economy has been halted, what we're seeing right now is stabilization at best.
James Cullen edits and writes at CollegeAnalysts.com. He is has no personal position in the stocks mentioned above.