Railroads and the Economy

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1 Railroads and the Economy North East Association of Rail Shippers April 27, 2016

2 Railroads Help Keep Coal- Based Electricity A cynic is a man who, when he smells flowers, looks around for a coffin. -H.L. Mencken SLIDE 2

3 Railroads Help Keep Coal- Based Electricity SLIDE 3

4 Coal: -697,019 (-12.0%) Railroads Help Grain: Keep 35,813 (3.4%) Coal- All other carloads: 34,703 (14.3%) Based Motor vehicles Electricity & parts: 25,844 (2.9%) Change in U.S. Rail Carloads: 2015 vs Note: intermodal is not included in this chart. Intermodal was up 214,770 units (1.6%) in 2015 over Source: AAR Weekly Railroad Traffic database Nonmetallic minerals: -23,006 (-8.9%) Stone, clay & glass prod.: -23,949 (-5.7%) Iron & steel scrap: -40,227 (-18.2%) Metallic ores: -49,764 (-13.7%) Petrol. & petr. products: -77,632 (-9.7%) Primary metal products: -85,123 (-15.3%) Chemicals: 6,547 (0.4%) Grain mill products: 2,659 (0.5%) Coke: -231 (-0.1%) Farm products excl. grain: -816 (-1.7%) Waste & nonferrous scrap: -1,321 (-0.8%) Food products: -2,577 (-0.8%) Primary forest products: -5,740 (-7.0%) Pulp & paper products: -6,800 (-2.1%) Lumber & wood products: -7,056 (-3.9%) Crushed stone, gravel, sand: -9,446 (-0.8%) SLIDE 4

5 Railroads Help Keep Coal- All other carloads: 22,576 (31.7%) Motor veh. & parts: 20,620 (7.6%) Based Electricity Chemicals: 14,289 (2.9%) Change in Originated U.S. Rail Carloads: Weeks vs. Weeks Total YTD 2016: 3,844,016 Total YTD 2015: 4,486,248 ( 642,232, or 14.3%) Note: intermodal is not included in this chart. Intermodal was down 9,527 (-0.2%) YTD 2016 vs. YTD Waste & nonferrous scrap: 6,264 (12.9%) Coke: 5,777 (9.8%) Stone, clay & glass prod.: -161 (-0.1%) Food products: -1,430 (-1.4%) Farm products excl. grain: -1,620 (-11.0%) Nonmetallic minerals: -1,997 (-2.9%) Primary forest products: -2,076 (-8.8%) Iron & steel scrap: -3,905 (-6.7%) Lumber & wood products: -4,014 (-7.0%) Pulp & paper products: -4,765 (-5.0%) Grain mill products: -9,792 (-6.2%) Source: AAR Weekly Primary metal products: -10,124 (-6.8%) Railroad Traffic database Crushed stone, gravel, sand: -11,827 (-3.5%) Grain: -14,225 (-4.0%) Coal: -574,459 Metallic ores: -20,739 (-23.7%) (-33.9%) Petrol. & petr. products: -50,624 (-21.7%) SLIDE 5

6 340,000 Total U.S. Rail Carloads (average weekly originations) 320, , , , , , ,000 SLIDE Data are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic

7 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Total U.S. Rail Carloads (% change from same month previous year) Data are based on originations, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR SLIDE 7

8 290, , , , , , ,000 U.S. Rail Intermodal Traffic (average weekly originations) 150,000 SLIDE Data are not seasonally adjusted, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic

9 U.S. Rail Intermodal Traffic (% change from same month previous year) 20% 15% 10% 5% 0% -5% -10% -15% -20% SLIDE Data are based on originations, are not seasonally adjusted, and do not include the U.S. operations of CN and CP. Source: AAR

10 What s This? SLIDE 10

11 Record U.S. Natural Gas Production (trillion cubic feet) U.S. natural gas production in 2015 was higher than ever before Source: Energy Information Administration SLIDE 11

12 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Price of Natural Gas to Utilities (dollars per million BTU) Source: Energy Information Administration SLIDE 12

13 U.S. Electricity Generation by Fuel (million megawatthours, ) 2,200 2,000 1,800 1,600 1,400 1,200 1, Coal Natural Gas Coal 52% 50% 45% 33% Natural Gas 16% 19% 24% 33% Nuclear 20% 19% 20% 20% Hydro 7% 7% 6% 6% Renewables 2% 2% 4% 7% Other 3% 4% 1% 1% Nuclear Hydro Renewables Source: Energy Information Administration SLIDE 13

14 Coal Stockpiles at Electric Utilities (days of burn) Bituminous Sub-bituminous Source: Energy Information Administration SLIDE 14

15 Coal Environmental Issues Key question: when are marginal benefits worth the cost? SLIDE 15

16 160, , , , , , ,000 90,000 80,000 70,000 60,000 50,000 U.S. Rail Carloads of Coal 08 (average weekly originations) Oct = 151,022 First 3 weeks April 2016 = 60, Data are average weekly originations for each month, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic SLIDE 16

17 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% U.S. Rail Carloads of Coal (% change from same month previous year) First 3 weeks April 2016 = 41% Data are based on originations, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR SLIDE 17

18 Coal as % of U.S. Railroad Tonnage 44% 44% 45% 47% 44% 43% 41% 39% 39% 37% Data are based on originated tons for Class I railroads. Source: AAR (FCS) SLIDE 18

19 Coal as % of U.S. Railroad Revenue 21% 21% 23% 25% 24% 25% 22% 20% 19% 17% Data are based on gross revenue. Source: AAR (FCS) SLIDE 19

20 Declared bankruptcy 3/13/2016. Declared bankruptcy 1/11/16. Declared bankruptcy 8/3/15. 8,400 employees in May 2015, 5,300 in March Declared bankruptcy 5/12/15. Declared bankruptcy 7/15/2015. What s This? TOP U.S. COAL PRODUCERS Production (mil. tons) Share of U.S. Total 1 Peabody Energy Corp % 2 Arch Coal Inc % 3 Cloud Peak Energy % 4 Alpha Natural Resources % 5 Rio Tinto Group % 6 Murray Energy Corp % 7 Westmoreland Coal Co % 8 Alliance Resource % 9 Energy Future Holdings % 10 NACCO Industries Inc % 11 CONSOL Energy Inc % 12 Patriot Coal Corp % 13 Peter Kiewit Sons Inc % 14 Walter Energy Inc % 15 Bowie Resource Holdings % SLIDE 20

21 Dow Jones U.S. Coal Index: Jan. '07 - Apr. ' Source: Bloomberg Finance Peabody Energy stock price: July 1, 2008: $1, Mid-April 2016: ~$2.07 SLIDE 21

22 U.S. Rail Carloads Excluding Coal 200, , , , , , , , , , , (average weekly originations) Data are average weekly originations for each month, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic SLIDE 22

23 U.S. Rail Carloads Excluding Coal 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% (% change from same month previous year) Data are based on originations, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR SLIDE 23

24 What Economies Do What Economies Do Where are we? Here? Here? Here? GDP Recession Expansion Time SLIDE 24

25 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Railroads Help Keep Coal- Based Electricity Year-Over-Year U.S. GDP Growth trend line '51 '55 '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '15 Source: Bureau of Economic Analysis Average: : 4.0% : 3.2% : 2.0% SLIDE 25

26 Disappointing Post-Recession GDP Growth 2.7% 1.8% 2.5% 1.6% 2.2% 1.5% 2.4% 2.4% -0.3% -2.8% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis SLIDE 26

27 $8 $7 $6 $5 $4 $3 $2 $1 $0 -$1 -$2 -$3 -$4 Goods Services C = personal consumption ~69% of GDP Railroads GDP = C + I Help + G + Keep (X-M) Coal Based total = $16.3 Electricity trillion (2012 $) I = investment (machines, housing, locomotives, etc.) ~21% of GDP Fixed nonresid. Fixed residential Source: BEA Intel. property (software, R&D, etc.) Federal State & local G= govt.* ~17% of GDP X-M = exports minus imports Exports add to GDP; imports take away from GDP Exports Imports *Excludes interest & social service programs SLIDE 27

28 Tangible vs. Non-Tangible GDP 12% 8% 4% 0% -4% -8% -12% -16% (% change over previous year) Tangible GDP subsectors* Non-tangible GDP subsectors** '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 *Includes imports, exports, and personal consumption of goods; fixed nonresidential investment; business investment in equipment and structures; government gross investment; and change in inventories. **Includes imports, exports, and personal consumption of services; intellectual property; and government consumption expenditures. Source: BEA, AAR SLIDE 28

29 Non-tangible GDP vs. Rail Traffic** 16% 12% 8% 4% 0% -4% -8% -12% -16% -20% (% change over previous year) Non-tangible GDP subsectors* U.S. rail carloads excl. coal & grain + intermodal correlation = 26% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 ** Includes imports, exports, and personal consumption of services; intellectual property; and government consumption expenditures. **Carloads excluding coal and grain + intermodal units. Rail traffic does not include the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 29

30 16% 12% 8% 4% 0% -4% -8% -12% -16% -20% Tangible GDP vs. Rail Traffic** (% change over previous year) Tangible GDP subsectors* U.S. rail carloads excl. coal & grain + intermodal correlation = 94% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 ** Includes imports, exports, and personal consumption of goods; fixed nonresidential investment; business investment in equipment and structures; and government gross investment. **Carloads excluding coal and grain + intermodal units. Rail traffic does not include the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 30

31 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 Crude Oil Spot Prices: Railroads Help Keep Coal- Based ($ per barrel) Electricity Brent Brent WTI June 19, 2014 $ $ Jan. 20, 2016 $26.01 $ % -75% WTI J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Source: EIA 2016 SLIDE 31

32 Railroads Help Keep Coal- Based Electricity SLIDE 32

33 Widespread Spillover Effects Huge spending cuts by energy companies affect huge swath of businesses Huge job losses Loan defaults leading to fear of contagion General uncertainty SLIDE 33

34 Overall Industrial Output Is Down U.S. Industrial Output (2012 = 100) Data are seasonally adjusted. Source: Federal Reserve SLIDE 34

35 Mainly Due To Resource Extraction U.S. Mining, Oil, and Gas Output (2012 = 100) Data are seasonally adjusted. Source: Federal Reserve SLIDE 35

36 Sluggish Manufacturing Output (2012 = 100) Data are seasonally adjusted. Source: Federal Reserve SLIDE 36

37 Manufacturing Output vs. Rail Carloads Excl. Coal & Grain Manuf. output (2012=100, left scale) Originated rail carloads excluding coal & grain (millions, right scale)* correlation = 91% *Carloads are for U.S. Class I railroads. Source: Federal Reserve, AAR (FCS) SLIDE 37

38 Iron & Steel Output vs. Rail Carloads of Primary Metal Products Rail carloads (right scale) correlation = 96% Iron & steel output* (left scale, 2012=100) Data are seasonally adjusted. Source: Federal Reserve, AAR 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 SLIDE 38

39 Lumber Output vs. Rail Carloads of Lumber & Wood Products* Rail carloads (right scale) correlation = 95% Lumber & wood output (left scale, 2012=100) ,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 *Carloads = U.S. and Canadian carloads of lumber and wood products and primary forest products combined. Data are seasonally adjusted. Source: Federal Reserve, AAR SLIDE 39

40 Paper Output vs. Rail Carloads of Pulp & Paper Products* correlation = 23% Rail carloads (right scale) Paper output (left scale, 2012=100) ,200 10,000 9,800 9,600 9,400 9,200 9,000 8,800 8,600 8,400 8,200 *Carloads = U.S. and Canadian combined. Data are seasonally adjusted. Source: Federal Reserve, AAR SLIDE 40

41 Chemical Output vs. Rail Carloads of Chemicals correlation =1% Rail carloads (right scale) Chemical output (left scale, 2012=100) Data are seasonally adjusted. Source: Federal Reserve, AAR 32,800 31,600 30,400 29,200 28,000 26,800 25,600 24,400 23,200 22,000 SLIDE 41

42 Motor Vehicle Assemblies vs. Rail Carloads of Motor Vehicles* Rail carloads (right scale) correlation = 97% Motor vehicle assemblies (left scale, 2012=100) *Carloads = U.S. and Canadian combined; includes parts. Does not include intermodal. Data are seasonally adjusted. Source: Federal Reserve, AAR 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 SLIDE 42

43 160, , , ,000 80,000 60,000 40,000 Terminated Rail Carloads of Crude Oil by Quarter Annual Totals , , , , , , * 482,525 20, *2015 is preliminary. Data are for Class I railroads. Source: AAR (Freight Commodity Statistics) SLIDE 43

160,000 Originated Rail Carloads of Industrial Sand by Quarter 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2010

44 160,000 Originated Rail Carloads of Industrial Sand by Quarter 140, , ,000 80,000 60,000 40,000 20, *2015 is preliminary. Data are for Class I railroads. Source: AAR (Freight Commodity Statistics) SLIDE 44

45 Lots of Mixed Messages in the Economy Right Now SLIDE 45

46 Trade Weighted U.S. $ Exchange Rate (March 1973 = 100) U.S. dollar has weakened in past few months, but is still relatively high Figures are the first of the month. Source: Federal Reserve Bank of St. Louis SLIDE 46

47 Purchasing Managers Index (PMI) > 50 = manuf. growing; < 50 manuf. shrinking Source: Institute for Supply Management SLIDE 47

48 Non-Manufacturing Index (NMI) > 50 = services sector growing; < 50 services shrinking Source: Institute for Supply Management SLIDE 48

49 1,300 1,200 1,100 1, SLIDE 49 Housing Starts Holding On (seasonally-adjusted annual rate, 000s*) , , ,111 Source: Census Bureau All Single family

50 Shaky Consumer Confidence? Source: Conference Board (1985 = 100) SLIDE 50

51 Sluggish Retail Sales $460 $450 $440 $430 $420 $410 $400 $390 $380 $ Intermodal is weekly average originations for the month. Data are seasonally adjusted and adjusted for inflation. Source: Census Bureau, AAR SLIDE 51

52 $460 $450 $440 $430 $420 $410 $400 $390 $380 $370 Strong Correlation Between Rail Intermodal and Retail Sales Rail intermodal (right scale) correlation = 92% Retail sales (left scale, $ billions) Intermodal is weekly average originations for the month. Data are seasonally adjusted and adjusted for inflation. Source: Census Bureau, AAR 280, , , , , , , , , ,000 SLIDE 52

53 Strong Auto Sales, But. (seasonally adjusted annual rate, millions*) (millions) *Passenger cars, SUVs, minivans, and pickups. Source: Bureau of Economic Analysis SLIDE 53

54 Good Job Growth Net New Jobs Created (000s) Annual Totals (millions) Source: Bureau of Labor Statistics SLIDE 54

55 11% Low Unemployment Rate 10% 9% 8% 7% 6% 5% 4% 3% Source: Bureau of Labor Statistics SLIDE 55

56 And Labor Force Participation Rate is Finally Rising 66.0% 65.5% 65.0% 64.5% 64.0% 63.5% 63.0% 62.5% 62.0% *The number of people considered part of the labor force divided by the working age population. Source: Bureau of Labor Statistics SLIDE 56

57 $1,600 $1,400 $1,200 $1,000 Corporate Profits Staying High $800 $600 $400 $200 ($ billions) All nonfinancial firms Manufacturing SLIDE 57 $0 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis

58 Reasons for Optimism? Trucks have their own problems Commodity cycles always turn eventually Healthy bank and household balance sheets Low inflation Resilience SLIDE 58

59 What Are Some Risks? Runs out of gas Problems abroad Financial disruptions Exchange rates Consumer retrenchment Elections Things can change quickly! SLIDE 59

60 What s This? SLIDE 60

61 Railroads Help Keep Coal- Based Electricity It says it doesn t have a clue what the economy will do. SLIDE 61

62 Class I Railroad Operating Revenue vs. Operating Expenses $80 $70 $60 $50 $40 $30 $20 $10 $0 ($ billions) Operating Revenue Operating Expense Data are not adjusted for inflation. Source: AAR SLIDE 62

63 Class I RR Diesel Fuel Expenditures ($ billions) $12.2 $11.4 $11.5 $11.6 $11.5 $8.1 $8.9 $7.9 $2.95 / gal $5.7 $6.7 $1.79 / gal Source: AAR SLIDE 63

64 Falling Class I RR Employment 176, , , , , , , , , ,000 SLIDE 64 Class I rail employment was 20,399 (11.7%) lower in March 2016 than in April Source: STB

65 U.S. Rail Traffic Units Per Class I Train & Engine Employee* *Figures are 6-month moving averages. Traffic = total carloads + intermodal units. Traffic excludes the U.S. operations of CN and CP, but employment includes them. Data are not seasonally adjusted. Source: AAR, STB. SLIDE 65

66 Class I Railroad Net Income ($ billions) $13.4 $14.4 $14.5 $10.9 $11.9 $9.1 $8.1 $6.5 $6.8 $ Source: AAR SLIDE 66

67 Assn. of American Railroads SLIDE 67

Bob Costello Chief Economist & Vice President American Trucking Associations. Economic & Motor Carrier Industry Trends. September 10, 2013

Bob Costello Chief Economist & Vice President American Trucking Associations Economic & Motor Carrier Industry Trends September 10, 2013 The Freight Economy Washington continues to be a headwind on economic