Lower rail volumes indicate sluggish demand but not a recession

U.S. rail volumes are poised to be lower in the first quarter compared with last year, but whether that decline indicates a looming recession remains to be seen.

“We’re seeing something more anemic,” said FreightWaves market analyst Jim Blaze. The level of the decline in rail volumes “suggests that the economy isn’t humming but that alone is not predictive of a recession.”

Year-to-date total U.S. rail volumes were 1.5 percent lower than the same period a year ago, at 6.12 million units, according to the Association of American Railroads. The volumes reflect totals through the week ending March 23. Of that, U.S. carloads are 2.5 percent lower, at 2.95 million units, while intermodal units are 0.6 percent lower, at 3.21 million units.

A rail volume decline in the 3 to 5 percent range previously suggested a downturn in the U.S. economy, Blaze said. But since the railroads don’t have as much market share anymore, that percentage decline is no longer the predictor it once was. Market analysts have pegged rail’s share of general merchandise traffic to be somewhere around 6 to 7 percent. Merchandise traffic consists of freight trains that don’t carry bulk commodities such as coal, lumber and grain.

The railroads have some exposure to merchandise, and declines there can pull rail volumes downward, according to Jason Seidl, managing director for investment firm Cowen and Company. But the railroads also handle a lot of bulk commodities, which aren’t as exposed to economic headwinds.

“It’s not something that worries me right now. We’ve heard of a definite slowdown in trucking,” and that can translate into some slowness in rail, Seidl said.

Other factors have also contributed to lower rail volumes so far this year. Bad winter weather in February, and then some economic slowness and the trade war between the U.S. and China pulled volumes lower in March.

Rail volumes might also be down is because of competition with trucking. Dispatchers are able to better track truck availability because of the federal mandate requiring electronic logs, and that awareness might give trucks a competitive edge over rail in some instances, a transportation consultant said.

With the second quarter starting next week, lower rail volumes could still persist. A number of buyers imported their goods last fall, ahead of the next round of U.S. tariffs that were scheduled to go into effect early this year, resulting in a pull-ahead of rail volumes.

But merchandise volumes don’t appear to rebound anytime soon. The market has been seeing fewer vessels in recent weeks because demand is down and there is not enough cargo to warrant a vessel, Blaze said. Furthermore, no one is sure when merchandise goods currently stored at the warehouses near the ports will move inland.

Meanwhile, the flooding in the Midwest has limited rail capacity to Chicago for BNSF and Union Pacific.

“All this complication adds up to what? This is not a good sign for volume-related growth year-over-year into the second quarter,” Blaze said.