How strong is the U.S. economy really? Did we come in hot to 2019 or were we flagging?
I think the rails provide an excellent overview of the country's commerce, and my thinking after reading the conference calls last week from Norfolk Southern (NSC) and Union Pacific (UNP) is that we still have a strong economy. However, I think that it's decelerating just enough to make you think that a rate hike near-term would make very little sense.
Keep that in mind when we approach the Wednesday Fed meeting and Q&A with Fed Chief Jerome Powell.
First, there's no doubt about it, we have a robust economy when it comes to railroads' profits, earnings per share, dividends and buybacks. Both railroads are experiencing a halcyon moment when it comes to rewarding their shareholders. While their stocks may not have done all that much in 2018 -- you made a few points with both -- there is no doubt it's a terrific time to be in the railroad business.
But here's the issue as it pertains to the Fed: there's no sudden fall-off of business, it's more the slowing in the rate of increase versus previous quarters in some key economically sensitive cargos. Plus, there is a noticeable and unnaturally strong forward pull of business, at least in the case of Union Pacific, because of the race to beat higher tariffs. Given the immense business Union Pacific does with shippers to Asia, including a fabulous tie-up with SMLine out of Long Beach, California, any read through of the amazing strength from those cargoes could be deceptive. It's an artificial spike, for certain.
These two rails had plenty of bright spots, intermodal -- trucks on trains -- being the chief one. Given the immense amount of business the truckers have right now, its intuitive that intermodal would be so strong, with Norfolk Southern pointing out that e-commerce was an actual driver in a strong fourth quarter. But Norfolk Southern did note that the trucking shortage was beginning to abate as the year ended, another warning sign.
Both saw strong chemical carload, chiefly related to plastics, no doubt a boon from amazingly abundant natural gas liquids from a host of Southeast and Southwest oil fields. But vehicles, a gigantic source of traffic? No growth whatsoever and neither rail expecting much of an increase. A decrease is more like it.
Agriculture is always a bright spot for the rails, but not this year. The tariffs crushed Union Pacific's ag line, which saw a 10% reduction in soy beans because of the lack of Chinese buying, although biofuel demand somewhat offset it. Again, too early to tell if that trade snaps back.
I was heartened to see a 10% increase in construction cargoes for Union Pacific -- primarily driven by rock which is vital for new roads, -- and a 19% strengthening in energy construction and manufacturing markets. That's part of the energy refining and shipping renaissance that's occurring in the southeast, a huge source of job growth.
At the same time, though, if you are worried about inflation, you have to take heart in the fact that labor costs aren't going up much at all -- especially versus profits and the ingenuous ways the rails are finding to lay-off people, all part of precision scheduled railroading we keep hearing about.
Precision railroading, a process developed by the late Hunter Harrison at Canadian Pacific years ago and then brought to CSX (CSX) by Harrison before he passed away at the end of 2017, is a term for much-faster freight turnarounds, less wastage and a demonstrably lower headcount. Union Pacific, with the hiring of Harrison lieutenant Jim Vena earlier this month, has now embraced Precision Railroading and the market expects instant results given the twelve dollars its stock spiked on the hiring announcement.
All in all, my read from the rails for American commerce is typical of what I see from the rest of the economy, a deceleration month to month in the fourth quarter, with fear of higher Chinese tariffs distorting the strength, coupled with better profits for shareholders without much inflation at all when it comes to wages. It's a positive moment, but one where the Fed would do best to stay its hand, because the biggest increases in commerce may have come from a desire to beat the tariffs, not from an acceleration of growth in the U.S. economy.
It's a perfect time for Powell to let things play out, and to say nothing more than that when quizzed at this Wednesday's press conference.