Wednesday, August 11, 2010

Railroads Suggest Recovery Is Soft

Individual investors are commonly told not to try to time the markets or pay all that much attention to macro issues like the economy. What investors should do instead, according to this thinking, is simply focus on buying the best stocks possible and not worry about the rest. Perhaps that works for some investors, but given how economic conditions can have a major impact on the value of a portfolio, it seems silly that most investors would not make decisions with a view towards the economy. 

Looking at monthly rail traffic is one way of assessing the health of an economy. While trucking is certainly a major component of the U.S. distribution infrastructure, and is absolutely essential for "the last mile" up to the docks at Wal-Mart (NYSE:WMT), it is not the only game in town. Railroads, particularly the large railroads (also known as Class 1 railroads) carry a huge amount of goods and are a critical link in the distribution change. It stands to reason, then, that the health of the rails has something significant to do with the health of the economy.

How Was July?One month does not make a trend, but July's numbers from the Association of American Railroads' Rail Time Indicators would seem to suggest that the pace of the economic recovery is slowing. Carloads were up 4% from last July and that pace of growth is slowing. Intermodal traffic is showing a similar trend, as the pace of year-over-year increases is starting to slow. Importantly, although traffic is well ahead of where it was a year ago, overall levels are still way below the old pre-2008 "normal". (For related reading, see Railroad, Trucking Earnings Growth Set To Keep Rolling.)

Looking a little more closely, metals, cars and stone products (like gravel) were strong, but coal and lumber were both weak. 

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