Rising Railroad Shipments Show U.S. Expansion Gaining Momentum

Growth in railroad-shipping volume shows the U.S. economic expansion is gaining momentum, even with rising energy prices in the first quarter.

Total rail volumes excluding grain and coal shipments rose 7.9 percent to 4.6 million carloads in the quarter ended March 31, according to data compiled by the Association of American Railroads in Washington. It was the second-highest increase in a first quarter, following last year’s 9.3 percent rise.

“This is almost double the first-quarter growth rates of the last economic recession, during the 2003-2006 recovery period,” said John Mims, a transportation analyst in Richmond, Virginia, at BB&T Corp. Rail volumes were on the “high end” of his expectations for the first quarter, and his projections for the second quarter assume the pace of volume recovery will continue.

Rail-car shipments that exclude coal and grain, such as chemicals and metals, represent the bulk of materials that go into industrial production, so an increase in volumes bodes well for the broader economy, Mims said.

“We’ve had no indications from the rails that they’re pulling back on their projections for strong commodity shipments throughout the year, which is a strong indication that industrial production will continue to improve,” he said.

CSX Corp. (CSX), the third-largest U.S. railroad, will increase margins by reducing expenses as a percentage of revenue this year and into 2012, Chief Executive Officer Michael Ward said last week.

Continue to Grow

The company’s plan is “that we’re going to continue to grow and that we’re going to continue to invest,” Ward said in an April 6 interview at Bloomberg’s headquarters in New York.

Mims has a “buy” rating on CSX, in Jacksonville, Florida, and on Omaha, Nebraska-based Union Pacific Corp. (UNP), which are “seeing more margin improvement” because of strong pricing gains and cost management, he said.

CSX fell 75 cents to $75.46, up 17 percent this year, and Union Pacific rose $1.24 to $96.59, gaining 4 percent this year, as of 1:55 p.m. in New York Stock Exchange composite trading.

According to Mims’ calculations, the correlation between the 12-month average of total rail-car loadings excluding grain and coal and the Federal Reserve’s industrial-production index is 0.88. A correlation of 1 would show the rail volumes and index move in lockstep, while a value of zero shows there is no relationship.

Rising Output

Manufacturing output, which makes up 75 percent of all industrial production, rose 0.6 percent in February, the eighth consecutive monthly increase, according to Fed data released last month.

The gains in the rail industry show the economy was able to withstand shocks such as severe winter weather, unrest in the Middle East, the earthquake and tsunami in Japan and higher gasoline prices in the first quarter, said Art Hatfield, a transportation analyst at Morgan Keegan & Co., based in Memphis, Tennessee.

“It’s pretty good when you consider we’re at the tail end of all the stimulus projects out there,” Hatfield said. “That’s an indication the economy is beginning to right itself.”

In its March meeting, the Fed’s policy-making Open Market Committee said indicators of industrial production “were at levels consistent with solid increases in factory output in the coming months” and its business contacts are planning to expand production to meet an anticipated rise in sales.

“A further increase in business activity also indicated that the economic recovery remained on track,” according to the minutes of the Fed’s meeting.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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