Rail Cargo Starts to Peak as Buffett Sees No Recession: Freight

Railroads are starting to see signs of a shipping peak ahead of the Christmas holiday season, signaling the U.S. economy is still expanding and fending off a repeat recession.

North American rail carloads reached a 2011 high in the week that ended Oct. 1, as did intermodal units, the containers that can move by rail, road and sea and usually carry retail goods, the Association of American Railroads said yesterday. Both cargo categories marked a third straight week of gains.

Traffic is rising from U.S. fall harvests, coal for winter heating and power, and gifts bound for store shelves, said Jeff Kauffman, a Sterne Agee & Leach Inc. analyst in New York. The late-arriving peak matches industry forecasts that the pickup in rail business wouldn’t begin until September, instead of the usual August, as companies make do with leaner inventory.

“The economy is slower, but it’s not shrinking,” Kauffman said in an interview. “Christmas will come. So, we’re going to have a peak season and we’re going to ship stuff.”

That’s welcome news to Union Pacific Corp. (UNP), CSX Corp. (CSX) and Norfolk Southern Corp. (NSC), the three biggest publicly traded railroads in the U.S. Warren Buffett’s Burlington Northern Santa Fe is second only to Union Pacific in sales.

“Our railroad carried 200,000 carloads last week,” Buffett said Oct. 4 at a Fortune magazine conference in Laguna Niguel, California. “That’s the highest total in three years. And that’s stuff moving around the country, supplying merchants and doing all kinds of things.”

Buffett, chairman of Berkshire Hathaway Inc., added: “As of today, the recovery is still under way.”

Weekly Gains

The industrywide carload total, which includes commodities as well as finished goods such as autos, was 408,383 last week, up 4.5 percent from a year earlier, according to the Washington- based AAR. Intermodal units rose 4.1 percent to 313,026.

Intermodal shipping containers can carry everything from electronics to clothes to appliances. Union Pacific Chief Executive Officer Jim Young said in an interview last month he watches intermodal shipments, along with autos and parts, because consumer demand was the “wild card” in whether the U.S. slips back into a recession.

“While the economy has slowed somewhat in the second half, we remain optimistic that gradual, steady recovery will continue,” CSX CEO Michael Ward wrote in a Sept. 27 letter to the Surface Transportation Board about the Jacksonville, Florida-based carrier’s peak-season plans.

‘Trains Are Moving’

The U.S. economy will grow 1.6 percent in 2011, down from 3 percent last year, said Nathaniel Karp, chief U.S. economist for Spain’s Banco Bilbao Vizcaya Argentaria SA. (BBVA) Gross domestic product rose 1.3 percent in the second quarter, according to the Commerce Department, after a 0.4 percent gain in the prior three months.

“The trains are moving, the carloads are moving, but not as strong as you’d like,” Karp said. “It confirms the economy is expanding. It’s just that the growth rate isn’t that good.”

The risk is that low consumer confidence and negative sentiment surrounding the stock market may hurt spending and create a “self-fulfilling prophecy” to push the country into recession, Karp said in an interview.

Karp estimated the chance of a double-dip recession at about 35 percent. The U.S. recession that ran from December 2007 to June 2009 was the longest contraction since the 43-month slump of the Great Depression, according to the National Bureau of Economic Research.

Jobs Report

While the U.S. jobless rate remained unchanged in September at 9.1 percent, employers added 103,000 workers, the Labor Department reported today. That topped the median forecast of 60,000 in a Bloomberg News survey of economists.

Consumer confidence rose in September to 59.4 on the Thomson Reuters/University of Michigan index, up from 55.7 in August. The last time that gauge was below 60 was in March 2009.

“It doesn’t feel like 2008 out there,” Jason Seidl, a New York-based analyst with Dahlman Rose & Co., said in an interview. At his firm’s recent transportation conference with trucking, rail and air carrier executives, “no one thought we were heading into a recession.”

Railroads have fared better with investors than many industries. While the Standard & Poor’s 500 Index was little changed in the past year, an S&P 500 gauge consisting of Omaha, Nebraska-based Union Pacific, CSX and Norfolk Southern rose 6.9 percent.

The best performer was Norfolk, Virginia-based Norfolk Southern, which gained 8.8 percent. It’s the biggest carrier of autos and vehicle parts.

Paring Inventory

Businesses’ preference for smaller inventory delayed the start of this year’s peak shipping season, Sterne Agee’s Kauffman said. Those stockpiles rose 0.4 percent in July, trailing analysts’ estimates of 0.5 percent and matching the lowest rate of growth since May 2010.

Retailers have to decide now whether to amass goods for a normal holiday season, because waiting until month’s end wouldn’t allow enough time for intermodal shipments from sources such as China to arrive by Thanksgiving, Kauffman said.

“If you have a semi-reasonable Christmas shopping period, you’re going to have a lot of stock-outs,” Kauffman said. “For the in-demand goods, you may end up with high air-freight bills.”

‘Fairly Muted’

That’s not likely to happen, said Justin Yagerman, a New York-based analyst at Deutsche Bank Securities Inc. who recommends buying Union Pacific and CSX. The peak season for shipments of imported goods has been “fairly muted” and probably will be over by the early part of this month, he said.

“Right now we don’t see that as a huge sustainable driver of freight levels looking out into the back half of the year,” Yagerman said. “That’s going to fade fairly quickly as we move through October.”

That outlook is in line with the one offered yesterday by FedEx Corp. (FDX) CEO Fred Smith, whose company operates the world’s largest cargo airline. He told an audience of business executives yesterday at a conference in Columbus, Ohio, that he expects a gain in holiday shipments that won’t be as large as last year’s, and a slow-growth recovery, not a recession.

Genco ATC, a third-party logistics company that helps shippers find carriers to move goods, has seen evidence of recovery and customers’ anxiety, according to Barb Pitroski, vice president of carrier and freight solutions.

While the Pittsburgh-based company has seen volumes increase in 2011, caution is the watchword among clients, she said.

“There’s growth,” she said. “But it’s cautious growth.”

To contact the reporters on this story: Thomas Black in Monterrey at tblack@bloomberg.net; Natalie Doss in New York at ndoss@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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