Toomre Capital Markets LLC

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Idle Intermodal Railcars… Recession Coming?

As frequent readers of the Toomre Capital Markets LLC ("TCM") Insights section are aware, Lars Toomre has been vacillating about the magnitude and duration of the economic slowdown that can be attributed to the decline in United States housing prices. Another hard data point has emerged that suggests that the economic slump may be more deep and prolonged (like certain members of Federal Reserve Board of Governors were worried about as reflected in the minutes of their March 2008 meetings).

On Monday April 7th 2008, The Los Angeles Times ran a story entitled Idle Cars Signal a Downturn which details how "The nation's top hauler of container rail freight, BNSF Railway Co., is parking miles of rail cars in Montana and elsewhere because there isn't enough freight to keep them rolling." These are not just a few cars either. Apparently Burlington Northern Santa Fe Corp., has parked upward of 1,000 cars in Montana alone, spokesman Gus Melonas said. More are parked in other parts of the company's 32,000-mile system, which operates in 28 states and two Canadian provinces.

"There's been a downturn in international business and therefore this equipment is not necessary at this point," Melonas said. The cars standing between Helena and Great Falls, Montana constitute 5% of the BNSF fleet, Melonas said. He declined to say what percentage of the fleet was parked elsewhere, citing confidentiality issues.

Many of these trains are used for intermodal transport shipment of freight being imported from Asia into the western United States container ports and then transported to points eastward. Apparently train car loadings used to transport coal, grains and ore are actually up year over year.

The article continues with, "One of the nation's leading trucking companies, Schneider National in Green Bay, Wis., says it believes a freight recession began about 20 months ago. 'We have been in a freight recession longer than people have been expressing deep concern about the economy,' said Bill Matheson, Schneider's president for intermodal transportation. Trucking companies often compete with railroads for long-haul contracts, while also carrying rail freight from the nearest railhead to its final destination. Schneider is not parking trucks, but neither is it buying new ones to the usual extent, Matheson said."

TCM wonders (with intermodal rail traffic falling off so) just how long the relatively strong American employment markets will hold up. If and when employment begins to fall significantly, then almost certainly we will enter a deeper U-shaped recession.