Watching the Rails for Economic Recovery

by: Zacks Investment Research

By Dirk van Dijk

In looking for an economic recovery, one of the things to be looking at is rail traffic. While an increasing part of the economic output of the country (and the world) moves electronically, there is still a very important role for, to use a technical term, "stuff." So far, nobody has figured out how to move a ton of coal or wheat over a fiber optic line.

Granted the "stuff" that moves on the rails is mostly lower value, but it is also at the base of the economic pyramid. In short, if stuff is not moving on the railroads, then the economy is not moving forward.

The volume of traffic is important for the information it provides about the economy as a whole, not just because it gives insight into what the earnings are going to be for the major railroads like CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC), Burlington Northern (BNI) or Union Pacific (NYSE:UNP). Like just about everyone else, their earnings should be on the ugly side, with expected declines of between 23.9% (for BNI) and 45.2% (for NSC).

The latest data available from Railfax is not very encouraging. There is a bit of a lag in reporting, so the "current week" in the table below is the week ending 6/27. Total rail traffic was running 20.6% below a year ago, and every major group except for food excluding grains was down by double digits.

More significantly, the current week is showing a bigger decline (-20.6%) than the four-week moving average (-19.7%), indicating that there has not been much of an improvement in the rate of change. The quarter-to-date numbers, which means almost all of the second quarter is somewhat weaker (-21.5%) than either the current week or the four-week average. On the other hand, it is also weaker than the year-to-date numbers (-18.8%), which would indicate that the second quarter was weaker than the first quarter.

Overall I see this as sort of bumping along the bottom, with a slight downward trend, and certainly not providing any evidence of "green shoots." When the economy starts to recover, we should see a pattern where the current week is better than the four-week average, which in turn is better than the quarter-to-date (once we have four weeks into the current quarter) which is in turn better than the year-to-date numbers.

The graph shows the year-over-year change in the 13-week moving average. If the economy is starting to improve, then it should turn Northward. Aside from a little blip in mid-March, it has been a Southbound express.

Not surprisingly, given the bankruptcies of two of the big three automakers, the weakest traffic has been from autos, closely followed by metals (a lot of metal goes into cars). Coal has held up relatively well, but since most of that is used for electric power, it is not as economically sensitive (in terms of volumes used) as some other areas. The weather can have as much influence on electricity demand as can economic activity.

Total US Rail Traffic