Tickers in this Article: WMT, BTU, ACI, UNP, CSX, NSC, GWR
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.

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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.

Reading into the Numbers
Perhaps I am reading too much into these numbers, but soft numbers for coal and lumber concern me. Soft lumber, particularly in the summer, is a pretty solid sign that residential construction is going nowhere fast; a view that is supported by a quick look at commodity lumber prices. Although the big decline that began in late spring has stopped and prices have stabilized, it looks like lumber is just bumping along a bottom for right now.

The coal numbers also make me wonder about the health of the economy. The U.S. economy can do alright without strong residential construction (residential construction was not a huge part of the economy before the bubble), but it is more difficult to see a healthy economy in a weak coal market. Given how preternaturally hot it has been in parts of the U.S. this summer, I find it interesting and a little worrisome that utilities are not bulking up their coal inventories. Equally to the point, can coal companies like Peabody (NYSE:BTU) and Arch Coal (NYSE:ACI) produce the meaningful sequential improvements in revenue that analysts are looking for in the absence of better volume?

The Bottom Line
If rail traffic continues to slow, I cannot see how that is not a negative for major rail companies like Union Pacific (NYSE:UNP), CSX (NYSE:CSX), Norfolk Southern (NYSE: NSC) and so on. Likewise, an overall slowdown in economic conditions will ultimately be bad for more specialized carriers like Genesee & Wyoming (NYSE:GWR) as well.

These are touchy times for the recovery. More and more observers are theorizing that strong second-quarter results were a product of inventory replenishment and that we will see earnings misses and lower guidance into the second half of this year. If rail traffic stays sluggish, that is a very valid worry - after all, it is hard to foresee how the economy grows if companies are not shipping more goods across the country.

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