Train-watching in the Two Percent Economy

Intermodal traffic and other freight sectors are up, but carload traffic is off, thus yielding a 2 percent railroad. A BNSF Railway intermodal train heads west out of Chicago through Western Springs, Ill., on Oct. 27, 2013. Jim Wrinn photo 

If you think the manifest freight trains you’re seeing today are less frequent and not as big as they were a few years ago, you’re right, and I can explain. We’re in what might be called a The Two-percent Economy, i.e., the gross domestic product is only growing at 2 percent a year, and rail transportation, being a derived demand (derived from the need to move something from where it is to where it needs to be), can only grow as fast as the GDP.

Seven years ago the economy was growing at a 6 percent per year clip; now it’s a third of that. Seven years ago railroad carloads (one intermodal container is a carload) were growing at the same rate, reaching an all-time high of nearly 725,000 loads per week in October 2006. That’s why you saw big, fast trains of boxcars, center-beam flats, covered hoppers, tank cars, and gons with coiled steel. 

Average per-week North American Class I rail shipments through Oct. 19 (Week 42 as the Association of American Railroads calls it) are up just 2 percent year-over-year (that is to say, compared to what they were for the first 42 weeks of 2012) to 685,000 loads. Merchandise carload commodities, those most sensitive to economic conditions, are not doing well. Fertilizer and industrial chemicals are up 2 percent, “forest products” (paper and lumber) are up 2 percent, finished metal products and ores are down 1 percent, and finished motor vehicles are up 3 percent.

Two of the rails’ biggest commodity groups in terms of sheer carload volumes, coal and agricultural products, continue to decline, but are down due to factors other than the North American economy: Low natural gas prices and Environmental Protection Agency pressure on coal-burning power plants for coal, and drought for agriculture, respectively. As a result, average year-to-date week 42 commodity carloads were exactly what they were a year ago: 375,000 units. 

True, there are some exceptions. Intermodal boxes are up 4 percent because of what railroaders call “highway conversions” — containers that were driven over-the-road from shipper to receiver are being moved on intermodal flat cars. Crude oil shipments are up 27 percent thanks to the Bakken crude oil field and other new oil discoveries. The “non-metallic minerals” commodity group is up 7 percent, mostly on so-called “frac sand” used in the hydraulic fracturing process for oil and gas drilling. How sustainable these last two are is anybody’s guess.

Unfortunately, when you’re a Class I railroad and you’re spending 15-20 percent of revenues (the Class I total capital spend is estimated at $14 billion this year) to repair, replace, and upgrade the physical plant, “anybody’s guess” won’t do. That’s why the railroads hire economists to read the tea leaves for where the economy is heading, and right now it’s heading for 2 percent growth through the end of this year and well into — if not through — 2014. 

Here are some sample data points as of the end of October. Unemployment still hovers around 7 percent, affecting discretionary purchases from cars to TVs; housing starts are flat to down, affecting lumber, roofing, furniture, etc.; jobless claims are up and non-farm payrolls down, affecting retail sales.

All of which says to me, we’re still a 2 percent economy where 93 percent of employable workers are providing all the goods and services needed by 100 percent of employable workers and their families. And when all of us — employed, not employed, and possibly soon to be unemployed — make do with less stuff, there’s less need to be moving stuff around the country by any means. And that’s one reason why non-unit trains of mixed freight are smaller and fewer.