No I am not referring to my son’s Thomas the Train obsession, but some very interesting statistics on our railroads. After Warren Buffett bought the 74% of Burlington Northern (BNI) he doesn’t already own (at a 30% premium) this month he quipped, “It is because my Dad did not buy me that train set when I was a child!” It seems that no matter what age we have an obsession with the rails. I wanted to give you the good, the bad and the ugly on the rails and what they mean to our economy.

The Good:
It took the board of BNI all of 15 minutes to approval the $44 billion deal with Berkshire Hathaway, which is the largest of Mr. Buffett’s career. As he stated this is an “all in bet” on the US economy and to me the deal speaks volumes about the
long term trends in the US economy as seen by its greatest investor. It
focuses on the “new normal” of slower growth overall, but a tilt to the scarcity and profit potential for commodities – namely imports/exports and coal. Here are some great statistics from that conference call. “In the
last 25 years, it cut employment from 500,000 to 175,000, while
increasing freight by 60% and reducing track by 40%, and now accounts
for 40% of the total goods moved in the country. Railroads are the
greenest transportation out there, a ton of freight requiring only a
gallon of fuel to move 470 miles.”

The Bad:
To give a clearer picture of the health of railroad traffic, the AAR has started comparing current numbers with where they were two years ago, prior to the start of the recession. Average weekly container loadings in 2007, and in 2006 for that matter, bounced around between 310,000 and 340,000. So while the latest reading shows carloads down 15% year on year, an improvement on the previous week, they still were down 17% compared with the same week in 2007. Indeed, to get back to a prerecession level, traffic would need to jump more than a fifth, according to The Wall Street Journal.

The Ugly (But Improving)
One of our favorite economic data series, the AAR weekly traffic report, showed that as of the end of October the year-over-year drop was nearly 14%. However, this time last year is when the US (and the global economies for that matter) came to a relative standstill after the Lehman bankruptcy. As we have moved into November we are beginning to see second derivative improvement in this data series. Volumes have actually increase sequentially to the highest absolute level since February 2009. As stated above, most of the improvement came from higher coal carloads. It will be very interesting to see what, if any, happens with cap-and-trade over the next year. It seems that President Obama has a few other priorities now such as improving the jobs picture, the health care bill and what to do in Afghanistan. Stay tuned! {TJM}