BofA: Waning rail volumes a “warning signal” for U.S. economy

Rail freight volumes in the United States dropped 2.5 percent year-over-year to 28 million carloads and containers in 2015, according to data from the Association of American Railroads.    Rail freight volumes in the United States fell the most in six years in 2015 and the outlook for 2016 isn’t much brighter, which could spell trouble for the broader U.S. economy, according to a recent report from analysts at Bank of America.
   “We believe rail data may be signaling a warning for the broader economy,” the bank said in its report. “Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis.
   “While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009.”
   Total rail cargo volumes in the United States fell 2.5 percent to 28 million carloads and containers in 2015, according to data from the Association of American Railroads
   Much of the decline can be attributed to steep drops in volumes for both coal and crude oil.
   Previously the railroad sector’s largest commodity by volume, coal volumes have fallen sharply amid new Environmental Protection Agency regulations requiring power plants to burn it more cleanly and a drop in the price of natural gas.
   Crude-by-rail volumes have seen a similar decrease as global oversupply and the economic recession in China have driven the price of crude oil to 12-year lows. Brent crude, the global benchmark for oil prices, has continued its dramatic slide in 2016, even falling below the $30 a barrel threshold during trading sessions earlier this week.
   The BofA report suggests the slowdown is spreading to more consumer-oriented segments, however, as intermodal carloads typically related to consumer goods fell 1.7 percent in the Q4 2015 after rising 1 percent in the first quarter and 3.6 percent in the second quarter.
   BofA analysts led by Ken Hoexter examined rail volume trends over the past 30 years to see what the current decline might mean for the overall U.S. economy. They found that each similar decrease in the past was either accompanied by or directly preceded an economic slowdown.
   “Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009…” the wrote, “all either overlapped with a recession, or preceded a recession by a few quarters.” The analysts noted that 1996 was excluded from the pattern due to an extremely harsh winter that year.
   “While many of the rails have successfully trimmed expenses commensurate with volume declines, we are concerned about the extent to which cost-cutting can support [earnings-per-share] growth targets,” they said in the report.
   Jacksonville, Fla.-based Class I railway CSX Corporation was the first of the major North American railroads to report fourth quarter and full-year 2015 financial results earlier this week, and the news wasn’t exactly inspiring as a the downshift in coal shipments had a substantial effect on the company’s profits and revenues.
   CSX posted net earnings of $466 million on revenues of $2.78 billion in the fourth quarter of 2015, year-over-year decreases of 5 percent and 13 percent, respectively, thanks in part to a 32 percent drop in coal volumes for the quarter.