Rail traffic data, as reported by the Association of American Railroads' "Rail Time Indicators," continues to show sluggish, but still very real growth in the industrial economy of the United States. Conditions are not great, as weaker coal and grain demand continue to impact total volume, but they are at least supportive of a cautious optimism on the overall U.S. economy.

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June's Numbers
For the month of June, rail traffic (as measured in carloads) declined 1.3% from the year-ago period and rose about 2.9% from May. Excluding coal, traffic rose 2.2% and excluding coal and grain moves the year-on-year comp was 4.2%. Intermodal traffic continues to grow nicely, as volume rose more than 5% from last year and almost 4% from May.

Rail traffic numbers are now at an interesting point from a chart-reading perspective. While traffic has been below 2011 and 2010 levels on a year-to-date basis, those trend lines have converged. If July traffic can surpass June, it may be the case that we look back on 2012 as a year where the lull hit earlier in the year and the recovery likewise began earlier.

SEE: Keep It Simple - Trade With The Trend

Industrial Data Is Positive, but not Strong
Rail traffic is still not at a point where Union Pacific (NYSE:UNP) or CSX (NYSE:CSX) shareholders should be doing handsprings. Looking at traffic on an "ex-coal/ex-grain" basis is all well and good for sussing out the health of the economy, but those sizable declines in coal (down 6.2%) and grain (down 10.6%) still take revenue out of the major rails' pockets.

By reporting category, there were 9 major categories showing growth in June - a sizable drop from last year (14) and May (13) and the lowest level in over a year (last year's May number was 8). What's more, the so-called "industrial" category was up just 2.2% - growth, yes, but not robust growth.

Along those same lines, it's worth noting that if coal and grain traffic should be excluded, maybe petroleum traffic (up 51%) should be excluded as well. Yes, Union Pacific and Berkshire Hathaway's (NYSE:BRK.A, BRK.B) Burlington Northern are doing good business bringing supplies like tubing in and shipping the oil out, but a lot of this outbound traffic is going to be taken up by new pipelines over the next few years.

SEE: A Primer On The Railroad Sector

Is Storage Worth Watching?
Like the overall traffic numbers, there are competing trends in the railcar storage numbers. Demand for auto carrier cars, box cars and so on has been solid, but hoppers and gondolas are going into storage because of the weak coal and grain demand. If those cars aren't going through their normal operating wear and tear, that could ultimately be negative news for order growth prospects at FreightCar America (Nasdaq:RAIL), Trinity (NYSE:TRN) and American Railcar (Nasdaq:ARII), while perhaps a relative positive for Greenbrier (NYSE:GBX) (which does not make coal cars).

The Bottom Line
The miserably hot summer may end up being good news for the rails, as coal demand doesn't seem to be all that bad, if not picking up in some areas. On the other hand, while hot temperatures may improve coal volumes, they could also kill the corn crop and reduce future grain volumes.

SEE: Grow Your Finances In The Grain Markets

Most of the major rails seem stuck in that middling area between "not too expensive, but not really a value either." Growth stories like Genesee & Wyoming (NYSE:GWR) and Kansas City Southern (NYSE:KSU) are priced accordingly, and Eastern rails CSX and Norfolk Southern (NYSE:NSC) still have coal, grain and European-related concerns to address. All in all, this is not an overpriced sector, but nor is it a striking bargain unless you really do believe in a solid second half economic pick-up in the U.S.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: UNP, RAIL, GBX, KSU

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