By JAMES DETAR
“With Union Pacific, Canadian Pacific Railway and CSX reporting downbeat quarterly earnings recently, company executives and analysts say the rail sector is clearly in recession — and the industry may signal contraction in the broader economy as well.”
Top U.S. railroad operator Union Pacific (UNP) said freight revenue for coal plunged 31% in Q4, and industrial products slid 23%. Chemical freight revenue fell 7%, and agricultural products dropped 12%. Automotive revenue rose 1%. Intermodal — containers used by trains, trucks and ships that carry consumer goods, such as electronics — declined 14%, indicating weakness beyond the battered energy sector.
The railroad slump, along with sputtering U.S. manufacturing, signs of plateauing auto sales, weak exports due to the strong dollar, and slowing growth in China all signal to some that the U.S. may be heading toward full-blown recession.
‘Death by a Thousand Cuts’
“With Union Pacific earnings today we did another of the death by a thousand cuts,” Nomura railroad analyst Matt Troy told IBD. “Their message was consistent with what we have been hearing. It’s another indicator the U.S. economy is stagnating, and we are increasingly stepping toward another recession.” Union Pacific management also voiced caution that auto sales aren’t sustainable at record levels and predicted 2016 freight volumes will be slightly lower.
Retail spending has been weak too, though consumers appear to be shifting their dollars to services from goods, and Union Pacific’s drop in year-end volume was still nothing compared to what was seen in 2008 and 2009, the company said. “It’s hard to speak to whether there is recession,” CEO Lance Fritz said on a conference call. “Certainly our volume drop-off is dramatic.”
Union Pacific shares fell 3.6% to 71, the lowest since April 2013. Canadian Pacific (CP), which reported a 19% drop in revenue from crude shipments, rose 0.5%.
Seen In Previous Recessions
CSX (CSX) CEO Michael Ward was more downcast after the company also reported dismal quarterly results earlier this month. “You can almost think of it as a straight recession except for, say, markets like automotive and housing-related,” he said on a Jan. 13 call. “You’re seeing pressure on most of the markets.”
The American Association of Railroads trade group said that total U.S. rail traffic for the week ending Jan. 16 was down 8.2% compared to the same week a year earlier. Shipments of intermodal containers, which made up 52.1% of total traffic, eked out a 1.1% increase for the week. But oil and petroleum shipments fell 18.5% and accounted for just 2.5% of total shipments. Coal was 14.9% of the total, but that’s far below the roughly 21% figure in 2013.
Bank of America – Merrill Lynch railroad analyst Ken Hoexter said the magnitude of the recent rail volume decline has only been seen five other times since 1985 — and they all preceded or overlapped recessions. “Railroads and trucks are viewed as leading economic indicators,” he said. “They don’t make anything, they just move it. And clearly less is being moved.”
Other economic indicators have also flashed warning signs. The latest gauge of manufacturing activity from the Institute for Supply Management pointed to a steeper decline in December, as the index dropped to 48.2, the lowest since June 2009, from 48.6 in November. (Readings below 50 signal contraction.)
But some economists don’t see the economy heading for a recession. Scott Brown, chief economist for Raymond James, said Q4 GDP numbers will be out next week and will likely come in lower than he had expected earlier. His outlook for this year is also weaker than before. “But my best guess is things are OK,” he added. There are seasonal factors muddling the outlook, such as consumers usually paying down holiday debt in January and February, cutting into their spending, Brown noted.
Unseasonably warm weather from El Nino is also affecting the economy, particularly in the Northeast and Midwest, he said. Retailers in particular have warned of mounting unsold inventories of winter clothing. As a result, “we won’t know the direction until spring, when the underlying economy will reveal itself,” Brown said.
Tony Cherin, professor emeritus of finance at San Diego State University, said the economy isn’t “headed anywhere near” two consecutive quarters of shrinking GDP, the traditional threshold for a recession. “Our economy may not be growing at the pace some people would like, but it’s still growing,” he said.
JAMES DETAR | firstname.lastname@example.org
Fed Faces Backlash As Retail Fizzles, Factories Fade
By JED GRAHAM
It’s becoming clear that the Federal Reserve ran out of patience and pulled the trigger on the first rate hike in nearly a decade as the economy was growing at a lowly 1% pace. New data showed that retail sales fizzled in December and factories slowed further, leading economists to mark down Q4 growth estimates. The Q1 outlook isn’t a whole lot better.
With oil prices and global stock markets plunging, criticism of the December rate hike is mounting. “Consumers are still keeping their purse strings tight, producers are reducing activity further and inflation — what inflation? Remind me again of the Fed’s argument for liftoff last month,” wrote Lindsey Piegza, chief economist at Stifel Nicolaus.
Retail sales sank 0.1%, about as forecast. But they also fell 0.1% outside autos vs. views for an 0.3% gain. Economists cited heavy discounting, with consumers unwilling to pay full price even with job gains picking up and gas prices plunging. Electronics store sales fell 0.2% amid price cuts on Apple (AAPL) iPhone 6S by Best Buy (BBY) and others.
Sales at general merchandise stores sank 1%, with that news coming as Wal-Mart (WMT) said Friday that it would close 154 U.S. locations, mostly smaller stores, and 115 others around the globe. Amazon (AMZN) and other nonstore sales rose 0.3% vs. November and 7.1% vs. a year earlier, the best rise since October 2014. Food service and drinking places (0.8%), building material and garden stores (0.9%) and furniture stores (0.9%) had strong gains. December industrial production slid 0.4% after November’s 0.9% fall, Fed data showed. Output fell 0.1% for manufacturers, 0.8% for miners and 2% for utilities. Total output fell 1.8% vs. a year earlier, the worst in six years.
January hasn’t gotten off to a good start for factories either, amid the strong dollar and weak global demand. The New York Fed’s Empire State Manufacturing Index fell at the sharpest pace since the recession. The S&P 500 fell 2.2%, tumbling intraday to a 15-month low. Crude oil settled below $30 a barrel, a 12-year low.
“The market is saying, ‘You guys made the wrong policy move,’ ” Piegza said, noting a flattening of the yield curve as the 10-year Treasury rate has fallen back to about 2%. That’s not yet an inverted yield curve, a recession warning when short-term Treasuries have higher rates, but a hint that the Fed is risking “severe negative consequences” if it keeps tightening.
Financial markets have dialed back their expectations for the next Fed hike from March to July, notes Harm Bandholz, chief U.S. economist at UniCredit. Global markets have focused on oil prices amid economic weakness in China and moves by the Chinese central bank to ease the yuan-dollar peg. But it’s hard to divorce those moves from upward pressure on the dollar that’s accompanied hawkish Fed signals. Richard Koo, chief economist of the Nomura Research Institute, wrote that Fed policymakers’ talk of multiple rate hikes this year may be “at least partly responsible for the market turbulence.” The Fed decided to act before wage pressures or other evidence of brewing inflation arose, hoping very gradual moves would avoid the need for an abrupt, disruptive tightening later.
With its key lending rate stuck near zero, the Fed has less ammo to reverse a downturn. But premature tightening raises the risk that sub-par growth will continue, with the Fed neither able to raise rates nor cut them much if the economy falters, Piegza said.
JED GRAHAM | email@example.com
ECB’s Draghi Signals More Easing; Jobless Claims Jump
By JED GRAHAM
New claims for jobless benefits rose by 10,000 last week, as the four-week average of claims hit its highest level since April. A key U.S. factory gauge was negative, but less so. Meanwhile, although the European Central Bank made no policy moves, President Mario Draghi signaled that bolder moves could be coming next meeting amid deflation worries. That helped lift oil prices.
ECB’s Draghi Ready to Intervene
The European Central Bank left its key interest rates unchanged, as expected. But after the ECB meeting, President Mario Draghi said the downside risks the eurozone have increased and said inflation expectations have weakened. He suggested the ECB is ready to adjust policy in March, rather than in June as many had expected. He said there are “no limits” to how far the ECB might go.
The EU Commission’s consumer confidence guage fell 0.6 point in Jan. to -6.3, a 3-month low.
Oil Prices Retake $30 Despite Inventory Build
U.S. crude oil inventories for the week ending Jan. 15 rose by 4 million barrels to 486.5 million, the Energy Information Administration said Thursday. That was less than the 4.6 million barrel rise estimated by the American Petroleum Institute late Wednesday, but more than analysts expected. Despite this, oil prices rose from 12-year lows, helped by ECB stimulus signals. West Texas Intermediate crude oil rose 4.6% to $29.65 a barrel after briefly topping $30 a barrel.
Jobless Claims Keep Climbing
Initial jobless claims rose by 10,000 to 293,000 last week, the highest since July, the Labor Department said. The four-week average rose by 6,500 to 285,000, the highest in nine months. Continuing claims also rose by 29,000 to 2.21 million. The rise in claims to start the year signals that robust employment gains at the end of 2015 aren’t being sustained, though claims under 300,000 still remain historically quite low. Store closings from Macy’s (M) and Wal-Mart (WMT), the latter of which won’t begin to show up until next week’s report, signal a more cautious hiring climate.
Philadelphia Fed Business Outlook Falls
Mid-Atlantic regional factory activity declined once again in January, though at a slower rate, the Philadelphia Federal Reserve’s manufacturing business outlook survey showed. The index rose to -3,5 from -10.2. The new orders measure almost broke even while shipments did turn positive. But the employment gauge turned negative and the business outlook gauge fell to its lowest level since November 2012.
Home Price Gains Accelerate
December home prices rose 8.8% vs. a year earlier, the biggest gain in 22 months, according to Redfin, a real estate brokerage. Sales climbed 7.7% vs. a year earlier, a big jump from November’s 2.8% gain. The supply of homes fell to a 2015 low and were down 5.4% vs. a year earlier. The supply of homes fell to 3 months, down from November’s 4.1 months.
Consumers Less Comfortable
The Bloomberg Consumer Comfort Index fell 0.4 point in the week ended Jan. 17 to 44, ending a 6-week string of gains to a 13-week peak. Subgauges for personal finances, buying climate and economic outlook all dipped. But the economic outlook gauge for Jan. overall climbed to the highest since June.
Russia’s central bank called a meeting with private and state-run banks as the ruble plunged to long-term lows due to weaker oil prices.
Articles from Investor’s Business Daily. (investors.com)