Railroads suggest economy on track
Freight volumes are up, making a double-dip recession less likely.
Although stocks look ready for another swoon, there is increasing evidence that the economy's midsummer slowdown is over. Just in the past week, we've had a number of positive data points: Weekly jobless claims are falling again, the trade gap closed sharply in July, the private sector continues to create jobs and the nation's factories continue to ramp up production.
Credit Suisse economist Neal Soss notes that while growth has clearly slowed from the pace enjoyed earlier this year, the slowdown isn't enough "to sustain fears of the dreaded double-dip release into renewed recession." In other words, slower growth is not the same as no growth.
In fact, one intriguing piece of insight suggests the economy isn't stalling but is roaring ahead. And that's railroad loadings, which have moved to their highest levels since November 2008 and are now up 12.2% over last year, thanks to steady string of gains since January. That's a big deal for the economy at large. Here's why.
Given that the transportation network sits between producers, retailers, and consumers, this is a fantastic sign that increased demand is revving up the supply chain. This isn't just a purchasing manager checking a box on a survey to indicate confidence. Increased freight volumes reflect actual ordering, shipping, and inventory decisions paid for with real money.
Breaking down the data, coal volumes were up 2% over last year, agricultural loads were up 8%, standard shipping containers were up 18%, industrial products were up 13%, and auto volumes were up 19%. Quarter-to-date, intermodel has been the best performer thanks to a tight truckload market and strong ocean freight activity.
Looking at specific railroad operators, Canadian National (CNI) led the way with an 18.6% increase in carloads in the most recent weekly data. Loads for metallic ores and minerals, basic building blocks of economic activity, increased nearly 40%. All of the major railroads reported heavy increases in metals and ores followed by motor vehicles.
While railroad activity and the specific demand we're seeing for metals and ores bodes well for the health of the economy, investors would be wise to hold off on any new purchases of railroad or commodity stocks for now.
As you can see in the chart above, the Dow Jones Transportation Average ($TRANA) is contending with overhead resistance and has moved into overbought territory. It's a similar story with materials stocks represented by the Materials SPDR (XLB).
Once we get a pullback, I'm a buyer.
Disclosure: The author does not own or control a position in any company mentioned.
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3 stocks will be in the spotlight Thursday as investors try to make sense of the numbers from the sector.
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