Submitted by Erico Matias Tavares of Sinclair & Co.
The US Economy: Still On Track?
Raw materials and goods need to be transported regardless of how modern or sophisticated an economy is.
Every week the Association of American Railways (“AAR”) posts a free report on rail volumes transported across North America by major category. This provides some decent clues on the condition of the US economy, almost in real time.
Let’s see what the latest report covering virtually all of 2015 is telling us.
The rail intermodal traffic category registers the long-haul movement of shipping containers and truck trailers by rail whenever combined with (a much shorter) truck movement at one or both ends.
In addition to its large relative size – accounting for 22% of 2014 revenue for major US railroads, more than any other single commodity group – intermodal is quite an important category since it covers a broad range of goods that Americans use every day, from computers to frozen chickens.
The graph above shows the year-on-year percentage change on a weekly basis going back to mid-2006. The weaknesses leading up to the 2008 financial crisis is pretty noticeable, as is the subsequent rebound. For the most part this indicator has remained positive since then, suggesting continued economic growth. That being said, the latest reports show a cluster of negative readings (red circle) which is a novelty in this cycle (by count, not magnitude). We will keep an eye on this one.
Now, let’s look at some major commodity groups.
Last March we looked at crude oil volumes transported by rail across North America. Here’s an update of the US petroleum products chart:
The gray shades represent the range between the minimum and maximum readings over the 5 years prior to 2015; the green line depicts 2015 readings. We can see that falling crude oil prices have finally impacted volumes transported by rail, with the latter part of the year showing a steep decline versus the top of the range (set in 2014). This reversal in trend is clearly not the friend of US oil & gas workers and their communities.
We had also indicated back then that this volume reversal could be gauged by the evolution of the WTI-Brent price benchmark spread, which as we know has virtually disappeared in recent months. A supply glut remains in force, although softness in demand in parts of the industrialized world also played a role.
Let’s move on to forest products, which includes lumber, a major component of house construction in the US.
After a very robust start of the year, volumes have fallen almost off the chart towards the end, breaching the low end of the range in the last week of December. This trend is clearly not a good omen for US employment and economic vitality in general given the importance of the housing sector.
The motor vehicles and parts category includes all kinds of vehicles (used and new), passenger car and bus bodies, parts and accessories and other related equipment.
The series has been very strong all year, setting new highs in this cycle on several occasions. Not much detail is provided so we can’t really say if these are predominantly new cars being built or used ones being sold, for instance. As such, this tells us more about the consumer than the underlying industrial activity.
What about grains? Given that corn, wheat and soybean prices remained depressed for most of the year volumes should have been strong right?
Well, not quite. 2015 touched both ends of the range at different times of the year, although on the whole total volumes mildly surpassed 2014. Different crop compositions can affect intra-year comparisons, as well as farmer decisions on when to ship (especially in a low price environment). The picture should become clearer in the coming months.
The metallic ores category, which includes all kinds of ores (iron, copper, lead, zinc and so forth) and waste scrap, has been decimated in 2015. This is not surprising given the substantial correction in the price of those commodities, evidencing at the same time the difficulties of the US mining sector. We may still need to see further volume reductions worldwide so that prices regain a solid footing.
We will conclude this summary review with coal, by far the single largest commodity transported in US railways.
Coal miners have also been badly bruised in 2015, as a result of a perfect storm in the sector: tightening environmental regulations, natural gas prices crashing, uncooperative weather patterns and enhanced electrical efficiency (we have talked about the latter last June, in the context of gauging US economic performance through electrical consumption). The latest reading is the lowest in our series going back to 2005, and less than half of the maximum amount over that period.
What to make of all this?
Our analysis of rail volumes provides a mixed picture of the US economy at this point: oil & gas and mining-related sectors are taking a real beating, some consumer sectors seem to be holding up and there are signs of weakness in the housing sector. 2016 should witness some type of a resolution here.
Happy New Year.