Rail Recession: Carloads Tumble To Thee-Year Lows Amid Manufacturing Implosion

As manufacturing plummets to the weakest levels since September 2009 and new export orders collapse, the US railroad industry has jus seen carload volumes tumble to three-year lows, according to a weekly report from the Association of American Railroads (AAR), first reported by Bloomberg on Monday. 

AAR's report showed a decline in carloads for 3Q19, down 5.5%, and one of the most significant drops in three years, indicating that the US economy continues to decelerate into year-end. Most of the shipment declines were seen in autos, coal, grain, chemicals, and consumer goods, but there was a small improvement in crude oil shipments.

Bloomberg blames the trade war between the US and China for the rail recession. 

"What's quite clear is that we're not yet at a trough. Trains have not yet bottomed," said Ben Hartford, an analyst with Robert W. Baird & Co. "We need to have some clarity in trade policy."

The manufacturing recession is more widespread than the mid-cycle slowdowns in 2012 and 2015/16. The slowdown has been concentrated in manufacturing for well over a year, driven by a downturn in business investments in 2019. 

The rail slowdown is a direct result of a manufacturing recession. As of last week, there is an indication that the downturn has spilled over into service sector output and employment.

Now, "there are no pockets of growth," said Bloomberg Intelligence analyst Lee Klaskow, who said a "railroad recession" could be imminent in a recent report. "There's really nothing that's tapping me on the shoulder saying, 'Hey look at me. I'm going to be your next growth engine.'" 

Klaskow said, a rail recession isn't a sign that a full-blown recession is imminent, but as we said a little bit ago, the slowdown has spilled over into services and employment, which could mean a much broader slowdown is already here. 

Last Friday, we outlined how class 8 orders crashed 71% in September, reaching 12,600 units. This makes September the 11th consecutive month of YoY order declines and the 9th consecutive month of orders below 20,000.

Class 8 orders, otherwise known as heavy-duty trucks, are often seen as a pulse on the US economy. That can also be said for rail.  

"That's the risk at this point in time, that the consumer does begin to show impacts from the pain that we see on the manufacturing side," Hartford said. As for rail freight, "when is it going to turn? I honestly have no idea."

And we can answer Hartford's question above: There are no indications that manufacturing will trough and turn higher this year - the deceleration should continue through year-end. This means a growth scare for the US economy is imminent, and or has already been triggered with the recent deluge of awful manufacturing and non-manufacturing data points.