https://www.aar.org/rail-industry-overview/
The economic landscape is raising concerns as signs of a slowdown become more apparent. In July, the unemployment rate climbed from 4.1% to 4.3%, shifting concerns from high inflation to rising joblessness. This marks the fourth consecutive rise in the unemployment rate, indicating that the effects of prior Federal Reserve rate hikes are now fully materializing, resulting in a notable cooling of the labor market.
Moreover, cracks are appearing across various sectors. Softer retail sales and rising credit delinquencies indicate that many consumers are feeling financial strain. Manufacturing is also showing persistent weakness, with the ISM® Manufacturing PMI® dropping to 46.8 in July, marking its 20th contraction in 21 months, and the JPMorgan Global Manufacturing PMI dipping below its three-month moving average to 49.7.
Historically, such a rapid rise in unemployment and slowdown in consumer spending within a short period has often signaled impending economic downturns. However, when considering the full spectrum of recent economic indicators, the overall likelihood of a recession remains low. While concerning, the recent rise in unemployment stems from an increase in the labor force rather than layoffs, and on the brighter side, inflation trends are leading to real (that is, inflation-adjusted) wage growth.
Moreover, AAR’s Freight Rail Index (FRI) for July 2024 indicates continued stability, countering fears of a significant economic slowdown. The FRI, which tracks movement of economically sensitive rail commodities, reached 110.0 in July, marking a 0.6% increase from June 2024 and a 6.0% rise from its level in July 2023. Historically, slowdowns in the FRI have preceded broader economic downturns, underscoring its reliability as an indicator of future economic trends. The current stability in the FRI suggests sustained demand for goods, which supports economic resilience. This contrasts sharply with the declines typically seen during historical economic slowdowns, indicating that the economy remains robust despite other concerns.
The stability and resiliency observed in the FRI align with other economic indicators suggesting that the fears of an impending recession may be exaggerated. For instance, the U.S. services sector showed signs of recovery in July, with the ISM® Services PMI® rebounding into expansion, in notable contrast to the ongoing stagnation in the manufacturing sector. This resurgence was driven by robust performance across ten industries, notably leisure and hospitality, accommodation and food services, financial services, and healthcare. This broad-based growth could alleviate recession fears that arose from last month’s surge in the unemployment rate and provide reassurance against a sharp economic downturn.
For the rail industry, the economic slowdown poses challenges due to reduced industrial production and a continuing shift in consumer spending away from goods toward services. However, steady overall consumer demand and supportive monetary policies may sustain or even grow intermodal traffic, helping balance some of the industry’s headwinds. This suggests that, despite some sector-specific challenges, the broader economic outlooks remain relatively stable.
Rail Traffic Analysis
In July 2024, U.S. railroads originated 1,073,191 carloads, marking a decline of 2.1%, or 23,353 carloads, compared to the same period in 2023. U.S. railroads also originated 1,319,818 containers and trailers, up 8.4%, or 102,549 units, from the same month last year. Overall, combined U.S. carload and intermodal originations in July 2024 totaled 2,393,009, up 3.4%, or 79,196 carloads and intermodal units from the same period in 2023.
Among the 20 carload commodity categories tracked by AAR each month, 12 categories saw gains in July compared to the same period in 2023. Notable year-over-year increases included grain, up 19,690 carloads or 26.5%; chemicals, up 4,797 carloads or 3.1%; and petroleum and petroleum products, up 4,048 carloads or 8.5%.
Several commodities experienced declines in July 2024 compared to the same period in 2023, led by coal, which continues to weigh down total carloads. Coal shipments fell by 35,167 carloads or 11%. Other commodities that saw decreases include crushed stone, sand and gravel, down 11,563 carloads or 10.6%; motor vehicles and parts, down 6,436 carloads or 9.1%; and primary metal products, down 2,971 carloads or 7.5%. Although industry analysts expected a boost in July automotive sales after a June computer system failure at dealerships nationwide, new vehicle sales were lower than anticipated. Excluding coal, carloads increased by 1.5% in July compared to the same period last year and 0.8% year-to-date.
For the first seven months of 2024, total U.S. carloads amounted to 6,642,565, down 4.1%, or 286,356, from the same period last year. Meanwhile, intermodal units totaled 7,962,928, up 8.6%, or 631,898 containers and trailers, from the same period in 2023. The increase in intermodal volume so far this year is largely due to higher port activity. Other commodities that saw year-to-date increases included chemicals (4.1%), petroleum and petroleum products (10.6%) and primary forest products (10.8%).
Bleak outlook for U.S. manufacturers poised to restrain rail traffic demand.
The chart below depicts the robust positive correlation between the FRI and manufacturing output. Historically, surges in manufacturing activity have catalyzed heightened demand for freight rail services, necessitating the transportation of increased volumes of raw materials and finished goods.
Despite a modest uptick in manufacturing output as firms cleared backlogs, the ISM® Manufacturing PMI® declined to 46.8 in July from 48.5 in June, marking the lowest level this year. This drop was primarily driven by a contraction in new orders, signaling a deterioration in manufacturing sector operating conditions compared to the previous month. The persistent weakness in manufacturing continues to suppress rail traffic, particularly for industrial commodities.
The consumer environment, which has so far helped steer the economy toward a potential “soft landing,” is beginning to exhibit signs of weakening.
In July 2024, U.S. railroads experienced a 9.7% seasonally adjusted year-over-year increase in intermodal volumes (8.4% non-seasonally adjusted). This represents a slight decline from June’s 8.9% seasonally adjusted (8.7% non-seasonally adjusted). The deceleration is likely due to waning consumer momentum. Intermodal traffic remains robust, yet elevated prices, political uncertainties and a cooling labor market are fostering increased consumer caution.
Despite these headwinds, consumer spending — which has buoyed the U.S. economy and fueled intermodal growth throughout 2023 — has shown resilience in the face of high inflation and interest rates. However, the latest data from July 2024 indicate a slowdown in the pace of spending on goods. This deceleration is expected to continue if the labor market weakens further.
For the rail industry, a potential slowdown in consumer spending presents significant hurdles. Intermodal traffic, which depends heavily on the consumption of goods, could see reduced demand as consumer caution increases. This rising caution is underscored by the Conference Board’s Consumer Confidence survey, which indicates growing concerns among consumers about current conditions. Overall confidence remains well below pre-COVID levels, driven largely by elevated prices for food and groceries. Until uncertainty in the labor market is ameliorated, it seems unlikely that consumer confidence will rise.
Although inflation has significantly decreased since the Federal Reserve began raising interest rates in March 2022, prices remain well above pre-pandemic levels. This persistent high inflation presents unique challenges for railroads. The Railroad Cost Recovery (RCR) index, which measures changes in the prices paid by railroads for labor, fuel, and materials, has risen faster than the Consumer Price Index (CPI) in recent years, highlighting the distinct cost pressures faced by the rail sector. A weakening labor market could further suppress wages and incomes, exacerbating risks to consumer spending.
Given that consumer spending drives 70% of U.S. economic activity and fuels rail traffic growth, a slowdown in this area poses risks to economic stability and the intermodal transport sector. It remains uncertain whether the slowdown in consumer spending on goods will persist or if the anticipated interest rate cuts later this year could provide some relief and potentially stimulate spending.
The Road Ahead
Although the Federal Reserve is almost universally expected to cut interest rates in September due to the cooling labor market and inflation that seems to be under control, the timing and extent of future rate cuts are highly uncertain. Interest rate cuts are almost certain to be incremental, meaning that higher interest rates will continue to be with us for a while longer. As has been the case for more than a year, those higher interest rates are expected to act as a brake on the economy and the labor market for the foreseeable future.
That said, as monetary policy loosens, it should release some of the pressure on that brake and economic activity should be stimulated. Economic theory says this will reduce financial strains and, it is hoped, enhance business and consumer spending. Additionally, better financing conditions could lead to a rise in imports and exports, enhancing the demand for containerized shipping services that efficiently connect major ports with broad inland markets.
