A recession forecast from the Economic Research Cycle Institute could point to a slump in rail freight volumes in coming months based on past correlations, says analyst Matthew Troy of Susquehanna International Group.
Troy told clients that shifts up and down in ECRI’s U.S. Weekly Leading Index tend to closely lead rail traffic by six months. ECRI warned Sept. 30 that its proprietary indicators clearly point to a new U.S. recession setting in.
“ECRI’s track record has been stellar over the last 15 years, with the firm correctly predicting every recession with zero false alarms,” SIG said.
So far, that recession threat is not showing up in freight rail activity, and rail CEOs have said they do not expect a downturn despite the slowing economy. North American intermodal volume reached all-time highs in late September, and bulk carloads are now the strongest of this year.
Troy said the recent strengthening in rail traffic has been “fuel for some optimism,” after volumes decelerated for much of 2011 and as a counterpoint to volatile stock markets.
However, “our analysis reveals an undeniably positive correlation between the (ECRI) leading index and rail carload trends six months later,” he said. The data relationship is not perfect, though, and the ECRI gauge went sharply negative in mid-2010 while rail volumes held up. But ECRI at that time did not issue a recession call either, Troy said.
For now, “we see ECRI’s call as a very real reason for continued concern,” he said, despite that stocks have begun to recover from recent lows.
SIG is still cautious in how to treat the recession forecast. “To be clear, we aren’t calling for a near-term rail volume collapse and still see longer-term value in rail shares,” Troy said. But “we see ECRI’s call as a very real reason for continued concern.”