U.S. rail freight volumes have been declining for months. They show the broad weakness of the industrial sector, which we downgraded this week.
Attentive American trainspotters won’t have missed that some economic engines have been running a bit slow for some time now. According to data from the Association of American Railroads (AAR), rail freight volumes have fallen for five consecutive months on a year-on-year basis. The most recent figures, which include the week ending July 6, show a decline of 7.6% compared to the previous year. Our "Chart of the Week" shows that the rolling 3-month averages have been below the previous year's levels for about a year. The lows of mid-2016 have not yet been reached, but the drivers have been similar. "The declining freight volumes are a result of a weakening economy. In addition, many companies are currently reducing their inventories," says Marcus Poppe, Portfolio Manager for Global Equities at DWS. There is one difference to 2016 - the oil sector. While its slowdown was worse than that of other sectors in 2016, it is now one of only four categories whose freight volumes have risen since the beginning of the year. All 16 other categories are in the red, with crushed stones, steel and coke doing worst of all.
These figures fit in with the broader picture that growth in the manufacturing industry is slowing. Some of its sub-sectors are doing considerably better than others but overall we do not currently see any broad-based catalyst for a recovery. That is why this week we have downgraded industrials to underweight. "We expect further disappointments in the reporting season as a result of weaker leading indicators and the first negative corporate reports. Even without an industrial recession, it is quite possible that earnings estimates for industrial companies will have to be revised downwards," says Poppe. The phenomenon is global, not just American. Manufacturing around the world benefited from a synchronized upswing for two years, and is now in a synchronized downturn. Investment is also suffering as a result of the uncertainty created by the trade war between the United States and China. But, at the same time, the "Chart of the Week" also shows that the engine is slowing quite gently. There continues to be no sign that, after its record run, the growth train is about to hit the buffers alarmingly.
Sources: Refinitiv, DWS Investment GmbH as of 7/10/2019