There are reasons for cautious optimism as the U.S. Rail Freight transportation market begins to recover. The U.S. experienced its fastest three months of economic growth in history, an annualized 33.1% in the third quarter. In the third quarter, all the main components of GDP grew sharply from the 2nd quarter including consumer spending (up 41% annualized), business investment (up 20%), and residential investment (up 59%). In October, unemployment was down to 6.9%.  With a vaccine clearly on the horizon, most economists expect the U.S. economy will grow 3 to 4% in the fourth quarter with a return to pre-pandemic levels in late 2021 or early 2022.   

October has been the top U.S. rail intermodal month for the past 26 years. This fall was no exception as inventory replenishing drove an intermodal rebound. U.S. railroads originated 292,469 containers and trailers per week in October, up 10% over 2019, and the highest weekly average for any month in history. Grain carloads averaged 26,507 per week in October 2020, the most for any month for grain since October 2007 (up 25.5% over October 2019, following a 27.8% year over year gain in September). Grain exports are improving as China buys more U.S. grain and soybeans to rebuild their country’s pork supply. Their need for grain will continue.  

Iron and steel scrap was up 29.1% over October 2019. Combined U.S. and Canadian lumber and wood products grew 5% in October, the best in more than two years. Autos and auto parts were up 2.6% in October 2020 from 2019, their first year over year gain in eight months, and the biggest gain in 14 months. With rail traffic headed in the right direction, freight cars in storage were down 13% to 439,557 units on November 1st compared to 504,043 in storage on August 1, 2020. Through the third quarter, 40,000 railcars have been scrapped.  As a result, fleet-wide utilization has returned to pre-pandemic levels. 

Regardless, demand remains soft for coal, petroleum and petroleum products, and small cube covered hopper cars. Competition to maintain equipment in service is forcing operating lessors to renew at rates lower than expiring rates. And railcar builders continue to slow production (27,218 units were delivered through the 3rd Qtr. 2020). Railcar deliveries for 2020 are now expected to be in the low 30,000’s.  

Due to tight truck capacity and driver shortages caused by the pandemic, current truck rates are as much as 15% higher than rail. Those higher truck rates create opportunities for a modal shift to the railroads. To improve rail’s competitive modal share a new rail industry coalition (‘RailPulse’) has been formed to accelerate the shift of traffic to rail by providing shippers real-time shipment visibility with tracking and location reporting of equipment, the ability to receive automated status reports regarding arrivals and departures, and real-time alarm reports due to shock impacts, damage, or standstill events. Additional supply chain initiatives include warehousing and transloading solutions that address first and last-mile delivery issues.  

Reasons to stay invested? Rail transportation will continue to play an essential role in the daily activity of the U.S. economy. As traffic trends improve, ensure your transactions are structured to add long term value. Call RESIDCO.

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