For months, year-over-year gains in rail freight traffic have countered gloom-and-doom warnings about the U.S. economy heading back into recession.
Now, however, research from rail analyst Matthew Troy suggests freight demand could be poised to weaken noticeably.
The U.S. Weekly Leading Index from the Economic Cycle Research Institute, a reliably predictive gauge of overall economic activity, also has a strong, 20-year history of leading rail shipment volume by about six months. That gauge is so clearly signaling a contraction that ECRI last month said a new recession is unavoidable.
For major railroads and short lines, business is growing, not stalling out. In fact, conditions have clearly improved since midsummer, when weekly bulk carloads and even intermodal traffic dipped year-over-year at times.
Rail traffic stabilized broadly in August. The North American rail system handled record intermodal traffic in the last half of September. And in early October, intermodal and bulk carloads showed year-over-year gains.
Although cautious rail executives say their traffic growth is decelerating, they also say their customers expect that growth to continue.
But Susquehanna International Group’s Troy told his clients, “ECRI’s track record has been stellar over the last 15 years, with the firm correctly predicting every recession with zero false alarms. Our analysis reveals an undeniably positive correlation between the (ECRI) leading index and rail carload trends six months later.”
ECRI also designs and manages a sensitive leading inflation and demand indicator for The Journal of Commerce, which is built from spot market prices for a basket of industrial raw materials. The JOC-ECRI Industrial Price Index, like the WLI, moved into negative territory in August, and the year-over-year decline has only accelerated since. As of Oct. 14, the JOC-ECRI IPI was down 19 percent from the same point last year. (To track the IPI since January 2010, see By the Numbers, page 64.)
Troy isn’t ready to commit his firm to a recession outlook for now, and notes the ECRI Weekly Leading Index last year turned sharply negative but rail traffic largely held up. So, “We aren’t calling for a near-term rail volume collapse and still see longer-term value in rail shares,” he wrote.
Last year, ECRI did not make a recession call. This time, given its track record and the way rail traffic usually follows its key index, Troy said, “we see ECRI’s call as a very real reason for continued concern.”