Rail Recovery Lags U.S. Economic Pace – But Merchandise Carloads Are Recovering

Written by Jim Blaze, Contributing Editor
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Union Pacific photo

Railroads are fundamentally directly involved in heavy manufacturing, resource commodities, energy and industrial production. Not so much e-commerce—at least not as direct movers and organizers. With that in mind, let’s examine how the railroad merchandise carload traffic pattern looks more than halfway through the third quarter of 2020.

Here is the bad news: 2020 could very well end up for the railroads as the worst overall freight volume loss year-over-year in the past 15 years. That goes back to the last significant drop in rail freight during the 2007-2008 Great Recession.

I will isolate only some of the data to better-interpret meaningful patterns. Translation: I will leave out a lot of what I call “data noise.”

Here is how this review is organized:

  1. 2020 compared to overall changes in full-year 2019.
  2. Changes so far into 2020 vs. 2019.
  3. Slices of 2020 compared to the previous year.
  4. Changes across the first three quarters of 2020.
  5. Changes during the third quarter year-to-date (YTD).
  6. Changes of the past trailing four-week average period.

I’m going to ignore the changes in the Week 36 and Week 37 AAR reports. Why? Too many possible distortions from a one-week change—particularly if it involved a holiday period (Labor Day) different than the same timeline a year ago.

Using data from multiple sources and consultancy railroad “watchers,” these next tables sort the commodities moved by the U.S. railroads. This first simple table segments the market by three groups:

Table 1: AAR data segments the market into three groups.

The heavy freight bulk movements are of course bulk traffic like coal or grain. That is about 17% of total railroad U.S. freight volume. The overall merchandise carload trains move about 29% of all unit volume cars. Notice intermodal, which about three decades ago might have accounted for only 15% to 25% of all rail-moved train types, but today averages more than half of Class I traffic, when seen visually as units behind locomotives.

BNSF photo

Remember that these are averages. A few railroads might have closer to 60% of what we could label as intermodal. How is 60% possible? Because, technically, moving finished automobiles and light trucks on train cars is a form of intermodalism. So is moving commodities that might easily be transloaded into a truck at an intermediate point. 

CSX photo

It is all about the actual physical definitions. Yet, the railroad language refers to intermodal only as TOFC (trailer on flat car) or COFC (containers on flat car). Here is a slightly different segmentation of the size of these three distinct cargo markets:

Table 2

Note that TOFC five decades ago was about 95% of the intermodal market. Today, trailers are less than 5% of the total railroad traffic … or about 10% of total intermodal units. Translation: Intermodal semi-trailers are slowly being abandoned as a market.

Table 3 is a bit more complex view of merchandise train freight. Six merchandise categories are defined by row, and one catchall category, All Other, covers about 40-plus named goods, things like canned food products and refrigerated foods, or perhaps manufactured washers and dryers, as examples:

Table 3: The percentage of volume data is a percent of all AAR traffic types, not just merchandise.

Here, from an economist (me), are takeaway points, starting with 2019 vs. 2018:

  • 2019 ended up the year with 2.4% less total merchandise traffic than was moved during 2018. Therefore, we see that a recessionary rail merchandise trend possibility was under way well before the pandemic arrived in February/March 2020. An exception was Petroleum Products, which was up about 12% vs. 2018.
  • Stone and Gravel, used for all types of construction, was down 8%—not a good economic sign heading into 2020.
  • Chemicals was down just under 1%—better but not great.
  • Total merchandise was down about 2%, in round numbers.
  • Not a single commodity within the merchandise area with growth except for Petroleum Products (mainly crude oil) with about a 25% swing, from a 12% gain the year before, to now down about 13%.

Our purpose here is to look strategically at the broad economic picture, not just the current mid-year 2020 period.

Canadian Pacific photo

Next, let’s examine what has been the 2020 low point. That would be the second quarter. Here are statistics that stand out:

  • Traffic like finished autos and light trucks down a whopping 65%.
  • Stone and Gravel down 20%.
  • The total rail carload merchandise group was down about 22%.
  • Chemicals down about 13%.

But there were two rail merchandise categories that did not fall as much. One was All Other, which includes foods and medium durable manufactured goods, down only about 9%. The other was Forest Products, down about 10%.

Third-Quarter Improvement

Now we are deep into the third quarter. How is rail merchandise doing? A recovery is under way. Chemicals are now down only about 5% year-over-year. All other merchandise carload is down only about 7%. Motor Vehicles traffic is down just about 1.5%.

Norfolk Southern photo

Yet, there were some struggling third-quarter year-over-year sectors:

  • Stone and Gravel were down about 24%, a bit more than in the second quarter.
  • Metals were still lagging, down 29%.
  • All merchandise as a group still down about 11%.
  • Chemicals still down 5%.

If we collapse Table 3 a bit, Table 4 shows us the new pattern into the third quarter:

Table 4

Importantly, for an old railroad economist like me, this table makes it easy to see the recent four-week trending data against the third quarter to date, and against the disastrous second quarter. Wow! Significant improvement, but no V-shaped economic recovery, except perhaps for a few carload commodities like Motor Vehicles, which in recent weeks were down year-over-year during the same four-week pattern only by some 2%. I’ll admit to a V pattern there.

Kansas City Southern photo

Chemicals were still down, but somewhat consistent in the quarter at about 5%. The All Other sector was down only about 5%.

Yes, across the carload merchandise market segment, a recovery is under way, but still lagging for:

  • Stone and Gravel (–22%).
  • Metals (–14%).
  • Petroleum Products (–14%).

From the following graph, we can interpret that there has been an overall trending at best described as stagnation of carload growth over the past two years, heading into 2020:

Table 5

This three-year graph pattern reminds me that there was something structurally challenging rail carload growth before the pandemic hit our economy in March. Was this part of a pattern reflecting a loss of competitive position, or just pains associated with struggles while trying to implement Precision Scheduled Railroading?

Do not just take this old railroader’s opinion. I might be too contrarian!

Independent railway economist, Railway Age Contributing Editor and FreightWaves author Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and FreightWaves. As always, contrary business opinions are welcome.”

CN photo
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