With another month in the books, U.S. railroad traffic still seems to fit and support a "cautiously optimistic" sort of outlook. Traffic growth is absolutely down relative to the post-recession recovery, but still continues to push in a positive direction. That said, data pointing to a slowing U.S. economy have started worrying investors in these stocks - while the Dow Jones U.S. Railroads Index is up more than 20% over the past year, September was a rough month.

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Still Largely a Question of Which Numbers to Look At
Continuing a familiar trend this year, "as reported" carloads were weak again in September with a nearly 4% (3.7%) drop. Strip the still-falling coal numbers out, however, and the carload traffic figure reverses to 3.4% growth. Take out grain as well and the number becomes a 3.7% growth rate for the month of September.

It's well worth repeating the fact that industrial traffic has been strong pretty much the entire year. Although the number of cargo categories with positive carload traffic growth declined to 10 (from 11 in August and 13 last year), industrial cargo (a category created/defined by the Association of American Railroads for its Rail Time Indicators report) rose 1% this quarter. Industrial traffic has been better than 2011 so far, but investors shouldn't overlook the slowing pace of that industrial growth.

SEE: A Primer On Coal

Individual Categories Still Showing Some Curious Trends
It was no great surprise that coal traffic was down by double-digits, falling about 12% this month. Natural gas prices have picked up, but are still well below the point of price equivalency for Appalachian coal. What's more, slowing economic conditions in Europe are not helping eastbound coal export traffic. Perhaps the best example of this state of affairs was in Norfolk Southern's (NYSE:NSC) warning of a sizable miss for the third quarter - although lost fuel surcharges have hurt results and Norfolk Southern has generally had more volatility in its coal business than CSX (NYSE:CSX) or Union Pacific (NYSE:UNP), it's still the case that weaker volumes are taking a toll.

On a more positive note, vehicle traffic was up 19% for the month of September. That's good for the rails, it's good for major OEMs like Ford (NYSE:F) and Toyota (NYSE:TM), and it's good for the long supply chain of parts and component makers such as Lear (NYSE:LEA) and Meritor (NYSE:MTOR).

More curious was the 12% increase in stone/sand/gravel, which the AAR attributed to fracking demand. The Baker Hughes (NYSE:BHI) rig count has been declining for a while (down almost 10% year-over-year for the first week of October), and multiple North American energy services companies have issued warnings for the third quarter. At the same time, petroleum carload growth continues to come in huge, allowing Union Pacific and Berkshire Hathaway's (NYSE:BRK.A, BRK.B) Burlington Northern to help offset declining coal volumes.

SEE: Earning Forecasts: A Primer

The Bottom Line
There seems to be an increasing amount of separation between the haves and have-nots in the railroad space. The earnings warning-related sell-off in Norkfolk Southern has pushed the stock down to a year-to-date loss, while other eastern railroads such as CSX and Kansas City Southern (NYSE:KSU) are definitely lagging behind Union Pacific and the Canadian rails. Decreased demand for agricultural chemicals (fertilizers) and coal is definitely impacting the east, and now there are growing worries about the health of the industrial sector as well.

Transportation stocks have been bouncing around since mid-May, and the separation between the performance of the transports and broader markets has some analysts and commentators concerned. It's certainly true that slowing industrial activity would/will be bad for the rails, but valuations have not gotten too out of line and investors who are still optimistic about the ongoing U.S. economic recovery may find reasons for optimism in the rails.

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

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