As we indicated last January, the weekly rail traffic report published by the Association of American Railroads (“AAR”) can provide a reasonable snapshot of US economic performance almost in real time by looking at diverse categories of transported goods and commodities. It can also highlight important changes in trends and areas of weakness, or red flags. So let’s see what these indicators are telling us midway through 2016.
We start with rail intermodal traffic, which 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. This covers a broad range of goods that Americans consume regularly, from laptops to frozen chickens. Since consumption drives the US economy this should give us some clues on recent performance overall.
As in the remainder of our analysis, the grey cloud in the graph above (in units) shows the maximum and minimum volume range recorded for the same week over the five years prior (2011-2015). The green line shows the readings so far this year. And as we can see, these have been quite lackluster since the start of the second quarter, after a strong start of the year. Is this telling us something?
Yes it is. To put these readings into perspective, we have accumulated year-to-date (“YTD”) values going back to 2006, as shown in the graph below (in MM units).
For the FIRST TIME since the 2009 recession, YTD values are down versus the prior year. The last time this happened was in 2007, which presaged significant economic weakness ahead, although with quite a lag.
Since many of these items are imported, this is a red flag not only in the US economy but also in countries that rely heavily on exports to the US. A sneeze here and emerging markets could catch another cold (or possibly something much worse). Given that this has been going on for some time, economists should not put the blame of this contagion on more recent events like BREXIT (although it is likely to open other cans of worms).
What about housing, another important sector of the US economy? The forest products category includes lumber, a key input of house construction, and is shown in the graph below.
Volumes have been quite weak all year, reaching levels below the minimums on several occasions. This is quite an odd reading since as per US Census Bureau data new privately-owned housing starts and under construction units were up in May compared to last year. Moreover, lumber futures prices have rallied strongly since the low in the second quarter of last year.
It is possible that the rail data is being affected by items other than lumber. However, it is also possible that supplies have been impacted and/or those new units are much smaller, requiring much less inputs – and less labor. Either way, lower volumes suggest a more muted positive impact on the US economy from the more bullish housing indicators elsewhere.
But there is another important sector in the rail traffic report which is undoubtedly bucking these declining volume trends. And that is automotive.
The motor vehicles and parts graph shown above includes all kinds of vehicles (used and new), passenger car and bus bodies, parts and accessories and other related equipment. Car manufacturing is a vital component of US industrial output, and this one has been on a tear all year, printing new cycle highs most of this year.
Now, are Americans really buying new cars or is this just inventory building? The latter of course is not as bullish for the economy.
The Wall Street Journal has a section on auto sales, which is updated regularly. This is shown in the graph above. Sales of light trucks have been steadily increasing while cars went the other way. But overall, on a YTD June seasonally adjusted basis, the 2016 total figure is almost 2% higher relative to the comparable period in 2015. So it’s consumers not stockpiles driving volumes.
Low fuel prices might have something to do with this. First there has been a clear shift towards the proverbial “gas guzzlers” (i.e. the light trucks). Then preliminary State Highway figures indicate that April YTD vehicle miles in all US roads and streets broke a new historical record. These are all signs of renewed economic activity.
The grains graph (above) depicts an interesting situation. Volumes had hovered around the middle of the cloud for most of the year, but then rocketed to cycle highs in the past few weeks. We don’t know exactly which grains are being transported, but prices of corn and wheat have taken a beating in recent weeks, reversing a decent rally beforehand. This suggests farmers of those grains may have used prior price strength to unload inventories. If that is the case then grain prices should remain pressured until those inventories are fully absorbed into the marketplace, absent any surprises in the growing seasons.
After a very bad performance all through 2015, metallic ores volumes (above), which include all kinds of ores (iron, copper, lead, zinc and so forth) and waste scrap, remain in the doldrums. As such large parts of the US mining sector are still struggling big time. In fact, the industry never really regained the volume highs recorded as far back as 2006, and are now 40% below that level on a YTD basis.
The silver lining, if there is one, is that as capacity is progressively taken out this paves the way for prices to find a bottom as supply meets demand. However, the latter may prove to be a declining moving target if global growth hits the skids.
Let’s look at another hugely important extractive industry in the US: oil production.
The graph above shows petroleum products (crude oil and refined products) transported across the US. This figure is sensitive to changing prices across major producing regions, as in many cases companies can arbitrage between rail and pipeline shipments in order to maximize netback prices. As such, volume declines may not necessarily correlate with production. Still, as we shall see, this should still provide a decent gauge.
And volumes are way down compared to the highs, a trend which has been accelerating since mid-2015.
This has important global ramifications. Why? The following graph shows change in daily crude oil production compared to December 2007 in major producing countries (MM bbls/day), as reported by the IEA.
The US has been the major force behind the increase in worldwide production over that period, adding a staggering 5+MM barrels of daily production. Nobody else even came close to that. However, production peaked in mid-2015, in line with our rail shipments graphs, as low prices finally hit the economics.
As the US comes off global supply could be impacted. Given that there is a lag in the reporting of the IEA figures (latest month is April), the declining rail figures suggests that US production has indeed continued to decline.
Therefore, the recent rally in crude oil prices may have a solid fundamental reason behind it: Americans in particular are buying bigger vehicles (generally less fuel efficient) and driving a lot more, at a time when domestic production is declining. While (still) substantial inventories may put a cap on further price rallies from here, it seems we should be past the lows of this cycle if these market dynamics persist.
And lastly, let’s look at coal shipments, an industry that provides a livelihood for many thousands of families across several US states. It is pretty clear that volumes have been decimated this year, on the back of an already awful 2015.
However, there has been some recovery in recent months, as the recent natural price rally changed the power generation arbitrage in favor of coal. But even if volumes doubled from these levels we would not come even close to maximums recorded several years ago.
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We like analyzing this data as it provides interesting clues on the performance of the economy and we can see how different categories interact with each other.
Overall, we see a general decline in volumes, in many cases indicative of a soft patch – even a red flag in the case of rail intermodal traffic. This is usually a warning of trouble further ahead, not necessarily a recession right now, as important areas like autos seem to be holding up.
But if these trends persist the economy could be sailing into troubled waters just in time for the Presidential election this November.
When the stock market will pick up on this is an altogether different question.