2020: Optimism—and Caution

Written by Luisa Fernandez-Willey, Senior Economist, Policy & Economics, Association of American Railroads
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Freight rail traffic has historically been a useful gauge of broader economic activity. The fundamentals of a strong U.S. economy were present in 2019: solid job numbers, strong consumer spending, low interest rates, economic expansion and low inflation. But despite all the bright spots, one thing remained certain last year: trade policy created uncertainty. This uncertainty affected multiple sectors of the economy.

Pivotal economic shifts this year will set the scene for the decade to come. Although a new chapter begins, concerns we’ve seen building over the past several years will likely reach either a conclusion or major turning point in 2020—concerns including the ongoing trade disputes and currently unrealized recession predictions. By diving deeper into 2019’s rail traffic numbers, we can get a glimpse into how these disparate stories have converged to shape the broader economy. They also provide us with a better understanding as to the current state of the industry and a better sense of what 2020 may bring.

Figures courtesy AAR

Consumer Spending Grew in 2019

The term consumer spending may bring up thoughts of Black Friday deals, but this type of spending also includes the goods and services that make American life possible and drive the health of our economy. Consumer spending accounts for approximately 70% of the U.S. economy, which means its rise or fall determines overall economic growth. It also signals the overall level of consumer confidence in the economy.

Consumer spending grew 3.9% on a year-over-year basis in November. Even as Americans slowed their spending toward the end of 2019, its healthy growth in recent months remained a bright spot in the economy. This spending helps keep the rail industry moving forward since it is one of the main drivers of rail intermodal business. It is also a key driver to continued economic growth. As part of an integrated supply chain, freight rail helps ship 54 tons of goods per American each year.

Intermodal: Second-Highest Year Ever

To get those goods to store shelves or a consumer’s doorstep, companies are increasingly relying on rail intermodal to meet customer demands for reliable, efficient deliveries. Even with the uncertainties of 2019, intermodal had its second-highest traffic year ever. And it wasn’t just consumer spending that helped make this possible; it was the railroads’ competitiveness, innovation and private investments.

During the past three decades, the intermodal sector has been the fastest-growing sector of rail traffic. However, until the past ten years, this growth has primarily been driven by international trade through North America’s ports. Over the past decade, domestic rail customers’ shipping needs have evolved, while more sophisticated domestic logistics and distribution patterns have driven the growth of railroads’ domestic intermodal offerings. To keep pace with this new landscape and meet customer demands, railroads have adapted their operations to remain competitive.

Given this performance, it will be crucial to watch the growth and development of intermodal throughout the 2020, especially as trade disputes are settled and railroads fully implement network efficiency improvements. Intermodal advances will be an important indicator of the rail industry’s ability to adapt to new market demands and provide customers with cost-effective, flexible service.

Chemicals: Second-largest Share of U.S. Rail Revenue

Chemical shipments by rail were an additional source of optimism, comprising the second-largest share of U.S. rail revenue in 2019 (behind intermodal and ahead of coal). From the chlorine that purifies drinking water to the fertilizers that help grow food, chemicals are an expanding sector for the industry, with their increase expected to continue in 2020. Driven by plentiful and affordable natural gas, chemicals have led expansion in American manufacturing. Chemicals represent half of all manufacturing construction spending in recent years.

Continued growth in the chemical sector will almost certainly drive increases in international trade as well growth in dependent U.S. industries. This development is bolstering rail carload traffic and intermodal export container traffic—particularly for plastic pellets, which go into everything from toys to cellphones and home insulation.

The American Chemistry Council estimates that an additional 300,000 annual rail shipments will be required to meet increased production by 2023. From our analysis, that translates to about 40% of their projected volume growth moving via rail.

Rail Traffic Fell in 2019 Due to Coal Declines & Trade Disputes

Despite these encouraging trends, several factors still contributed to uncertainty within the rail industry. Overall rail traffic fell in 2019, due largely to a 9.2% decline in coal carloads vs. 2018. Advances in natural gas extraction and increased use of renewables for electric generation have led to significant, longer-term declines in the demand for coal, resulting in 2019 coal carloads being the lowest in decades. This trend is not expected to change materially in the future.

The continued softness in coal markets drove the most significant declines in 2019 carloads, but trade uncertainty and tariffs proved a powerful headwind for other rail customers, particularly some in agriculture and related industries. 2018 was a record-breaking year for intermodal as imports came ashore earlier to beat potential higher tariffs. This means comparisons from 2018 to 2019 were distorted. The ongoing international trade disputes have had a disproportionate impact on rail-served industries, hitting them harder than the economy overall. The rail industry is deeply linked to trade: 42% of rail carloads and intermodal units and 35% of annual rail revenue are associated with international trade.

As we head into 2020, greater clarity on trade will be vital for the rail industry and its customers. A clean and final ratification of the United States-Mexico-Canada Agreement (USMCA) will be key in establishing this clarity, hopefully followed by resolution of ongoing trade disputes with China.

2020 & Beyond: Railroads Remain Focused on Meeting Customer/Consumer Needs

The 2010s were a period of transition and transformation for the rail industry, with commodities that have historically dominated rail shipments declining and new commodities rising to take their place. Last year’s softer carload numbers—due to both a normalization after 2018’s anomalous bump in traffic and longer-term commodity declines—are part of the process of this transition. However, promising new developments remain on the horizon, and we expect them to drive future growth.

The rise of intermodal in particular—as well as growing political support for trade agreements like the USMCA—are cause for optimism, leading railroads to adapt and modernize to meet customers’ needs. With greater certainty on trade policy and as railroads effectively implement operational changes aimed at increasing efficiency, the industry is poised to meet renewed customer demand this year and in years to come.

Luisa Fernandez-Willey is a Senior Economist, Policy & Economics, at the Association of American Railroads. She is responsible for conducting quantitative and qualitative research and analysis on economic and policy issues affecting freight railroads, their customers, and their competitors in response to the needs of various AAR departments, committees, and its constituent railroads. Additionally, she is responsible for assisting with the data collection, processing, editing, and production of several AAR publications and databases. Fernandez-Willey has conducted webinars where she discussed economic data and railroad traffic trends. Her professional experience prior to joining the AAR includes financial management consulting, economic research supporting government and private sector clients, and academia. She is also a published economist. Fernandez-Willey holds an M.A. in Economics from the University of Missouri-Kansas City.

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