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Tickers in this Article: UNP, CP, CNI, NSC, CSX, BTU, WY, DD
If you really want to know what is going on in the economy, you cannot just look at the flashy headline economic data that comes out every month. You need to know what is happening at the "street level", and that is why I am a fan of following railroad traffic data.

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April Was A Strong Month
According to data produced by the American Association of Railroads (in its monthly Rail Time Indicators report), U.S. carloads jumped almost 16% from the year-ago level and hit their highest number since November 2008. Likewise, Canada was quite strong - carloads jumped almost 27% annually and ended up at a level not seen since October 2008.

Now, it is true that the year-ago level was abysmal, so the year-over-year comparison was easier. But progress is progress, and the fact that every major cargo category was positive for April strikes me as good news.

More Carloads Should Mean More Revenue
April's data also showed that just under 24% of the railroads' cars remained in storage, down from 25% at the beginning of the month. As you might imagine, railroads like Union Pacific (NYSE: UNP) and Canadian Pacific (NYSE: CP) do not make any money off idle cars. Think of this statistic, then, like you would with any other industry with mothballed capacity - as demand increases asset utilization, there will be more revenue, better amortization of overhead and profit growth.

Not Just "Restocking" Anymore
Since the lows in early April, traffic in commodities other than coal and grain has been rising steadily. If the skeptics on the U.S. economic recovery were right, why have we seen a relatively smooth increase in traffic and not an occasional burst of activity as producers restock their inventories to maintain production? Moreover, guidance from railroads as diverse as Canadian National (NYSE: CNI), Norfolk Southern (NYSE: NSC) and CSX (NYSE: CSX) has been relatively consistent. Activity, as well as pricing, is picking up.

Keep An Eye On Coal
There is no denying the fact that coal is a huge component of North American rail traffic, as it comprises a huge percentage of all railroad traffic. It is, after all, the primary source of power in this country, and whatever environmental battles may be afoot, that statistic is not likely to change.

Simply put, when the economy is growing, there is more demand for power and more demand for coal. When the economy contracts, coal stockpiles build up. As major coal companies like Peabody Energy (NYSE: BTU) have told us, utilities built exceptionally large stockpiles throughout 2009. Some of this may have been due to advantageous contracts and a desire to hedge against future price shocks, but the bottom line seems to be this - coal is on the move again, and that suggests to me that the economic recovery is on reasonably sound footing. (For more, see Profiting In A Post-Recession Economy.)

One Month Does Not An Investment Make
By no means should an investor rush to buy a railroad stock, nor any other kind of stock, simply because one month of interesting information looks promising. Nevertheless, there does seem to be a compelling case for further success in the railroad sector as traffic appears to be increasing with some momentum.

Even if you have no investment interest in the rails and do not invest in bulk commodity companies, look at rail traffic as an important economic signal. After all, companies like DuPont (NYSE: DD) and Weyerhaeuser (NYSE: WY) do not contract with the railroads simply so their chemicals and lumber can take a little vacation and see the country. Whichever direction the carloads are moving, it is a fair bet that the economy is heading in the same basic direction.

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