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Tickers in this Article: GWR, BRK.A, AEP, DUK, GE, DD, UNP
During times of economic uncertainty, many investors look far and wide for data to help make sense of it all. Unfortunately, rail traffic data is not a big help today. Much like that classic Monopoly illustration of a man with his palms out and seeming to shrug, it is hard to get much useful information on the economy these days from the traditional measurements and statistics. Perhaps that is just how things are today; there are certainly signs that recovery continues to crawl along, but there are plenty "danger" signs flashing along the way.

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Another Dip Down
The strong recovery trend in rail traffic is definitely over and done with for now, as July's results showed another decline (the second in four months). Rail traffic in July fell 1% from last year's level, while it did climb 0.7% on a sequential basis. Canadian traffic was quite a bit stronger, up 3.7% from last year, and intermodal was strong both in the U.S. and Canada.

And now for the "but." In this case, the decline in carloads was a function of weakness in coal and grain. In fact, if coal carloads had been flat year on year, the total carload result would have been up more than 2%. Then again, there is another "but" to counterbalance that - 12 of the 20 categories that the Association of American Railroads tracks for its Rail Time Indicators report (the source of the information for this article) were positive, down from 14 in June and 13 a year ago.

Offering a third "but", it's worth noting that traffic data can be idiosyncratic. Short-line rail operator Genesee & Wyoming (NYSE:GWR), for instance, reported over 16% traffic growth in July. So while it is broadly true that major rails like Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern or Canadian Pacific (NYSE:CP) will match these trends, there is certainly room for company-by-company differences in carload traffic, traffic composition, and intermodal activity.

Blame It on the Rain?
It is not as though America has suddenly shifted away from coal as an energy source or abandoned carbohydrates again; the declines in coal and grain traffic seem to have more to do with regional flooding than any real demand factor. Still, rain may not be the only answer to what is going on with the coal category. July's result was the second-worst in two years, but June's performance would have been fifth-worst in that same timeframe.

Looking at coal stockpiles does not add a lot of clarity to the picture. Utility stockpiles are pretty much smack dab in the middle of the 2007/2008 lows and the 2009/2010 highs, and have been rising. That seems curious given the increased economic activity and the warmer weather this summer. If big coal users like American Electric Power (NYSE:AEP) and Duke Energy (NYSE:DUK) are gradually building stockpiles despite wobbly carload traffic, it is worth wondering why that is.

Will the True Traffic Stand up?
Grain and coal traffic are surprisingly volatile in terms of month to month carload traffic, and Canadian grain traffic is absurdly volatile. Consequently, it makes sense to look at rail traffic trends excluding these commodities. Do that, and there is a fairly steady upward trend in the pace of railroad car traffic growth. That is good news, then, for companies like General Electric (NYSE:GE) and DuPont (NYSE:DD) where revenue growth is highly correlated to GDP growth. In fact, overall railroad traffic growth in general tracks pretty closely with U.S. GDP.

The trouble, though, is that while pulling coal out of the traffic numbers may make it more useful to economists, coal traffic is still a major part of the railroad business. So it may be informative to ignore coal when trying to assess what these traffic numbers say about the economy, but the weird state of coal traffic is very much a real issue for railroad carriers like Union Pacific (NYSE:UNP), CSX (NYSE:CSX), and Norfolk Southern (NYSE:NSC) that need that revenue.

The Bottom Line
Rails are one of the precious few industry groups that still show positive year-to-date stock market performance. Ongoing growth in ex-coal/ex-grain rail traffic is encouraging, as is the ongoing growth in intermodal demand. Still, it is worth mentioning to prospective railroad stock investors that rail traffic is a product of derived demand and it will be much harder for these stocks to outperform if GDP in the U.S. continues to weaken. (For additional reading, see A Primer On The Railroad Sector.)

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