Lower Rail Volumes Indicate Slowdown In US Economy

By Michael Hooper

If railroad volumes are the tea leaves for the economy, the American economy is likely to slow down in the third quarter.

Total traffic in the first 34 weeks of 2019  on US railroads railroads was 8.6 million carloads, down 3.4% from the same point last year and 9,055,095 intermodal units, down 3.8% from last year, according to the Association of American Railroads.

Traffic in Week 34, ended Aug. 24, 2019, on U.S. railroads fell 5.9% compared with the same week in 2018.

I've been watching these railroad volumes for many years. Short-term changes in volumes don't mean much, but when there is a continuous steady decline in overall traffic -- like there is now -- GDP usually declines. The railroads carry heavy freight such as autos, metals, grains, and merchandise in containers shipped from Asia. Shipment of containers are down for US railroads compared to a year ago.

Intermodal traffic at Union Pacific Railroad was down 4% year-to-date through week 35, according to its weekly carload report on its website.

Union Pacific Railroad reported a decline of 11% in the shipment of intermodal containers in week 35 compared to volumes in week 35 a year ago. UP's third-quarter-to-date shipments of containers were down 10%. Containers with goods or merchandise are often shipped by boat from Asia to ports on the West Coast where Union Pacific and Burlington Northern Santa Fe pick them up and carry them to Chicago and elsewhere.

In an SEC filing on Sep. 4, 2019, Robert M. Knight, Jr., executive vice president and chief financial officer of Union Pacific, lowered UP's outlook for the second half of 2019. The filing says Knight presented at the Cowen & Company 12th Annual Global Transportation Conference. In Knight’s prepared remarks he confirmed the company’s expectation of a sub-61% operating ratio for full-year 2019, while updating the company’s volume guidance, stating that the company now anticipates volume for the second half of 2019 to be down mid-single digits as compared to the second half of 2018, versus a previous estimate of down 2%.

BNSF Railway container traffic declined 4% year-to-date and trailer traffic was down 10% year-to-date, according to its weekly volume reports.

Just about all categories of freight are down so far this year at BNSF except chemicals, nonmetallic minerals, grain mills and petroleum, according to its weekly carload reports. Petroleum volumes were actually up 26% year-to-date at BNSF, which owns tracks in the Dakotas, where there is substantial drilling in the Bakken.

BNSF saw declines YTD in grain, coal, autos, lumber and wood and steel and scrap. Lumber and wood really fell off in week 34 at BNSF, declining 18%, and down 8% third quarter to date. Third quarter ends Sept. 30.

Real gross domestic product (GDP) increased at an annual rate of 2% in the second quarter of 2019, according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.1 percent.

The Institute for Supply Management’s manufacturing index fell to 49.1% in August from 51.2% in July.

Any reading below 50% indicates a contraction in activity. This is the lowest reading since January 2016. This means there is a slowdown occurring in manufacturing. Manufacturing is about 11.6% of the U.S. economic output.

Consumer spending accounts for 70% of GDP.

Trade tariffs are likely a driver of the decline in railroad traffic, specifically the container and grain traffic between China and the United States.

Disclosure: Michael Hooper owns shares of Union Pacific (UNP) and Berkshire Hathaway (BRK.B), owner of BNSF Railway.