Railroads - The Economy and Trade 2017 National Coal Transportation Association Denver, Colorado September 19, 2017
Railroads and the Economy 2017 SLIDE 2
Coal: 365,806 (14.1%) Railroads Help Keep Coal- Based Electricity Crushed stone, gravel, sand: 98,663 (13.0%) Grain: 18,660 (2.5%) Primary metal products: 14,355 (4.7%) Iron & steel scrap: 6,368 (5.1%) Nonmetallic minerals: 5,391 (3.5%) Coke: 3,942 (2.7%) Metallic ores: 2,020 (1.1%) Waste & nonferrous scrap: 1,874 (1.4%) Chemicals: 846 (0.1%) Farm products excl. grain: 345 (1.2%) Lumber & wood products: -152 (-0.1%) Pulp & paper products: -2,162 (-1.1%) Grain mill products: -2,816 (-0.9%) Stone, clay & glass prod.: -2,961 (-1.1%) Primary forest products: -4,175 (-9.3%) Food products: -5,028 (-2.3%) Carloads n.e.c.: -6,533 (-3.1%) Motor veh. & parts: -44,452 (-7.1%) Petrol. & petr. products: -56,563 (-14.5%) Change in U.S. Rail Carloads: Jan.-Aug. 2017 vs. Jan.-Aug. 2016 Total carloads: 393,428 (4.5%) Note: intermodal is not included in this chart. Source: AAR SLIDE 3
U.S. Rail Carloads of Coal 140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 (average weekly originations) 2011 2012 2013 2014 2015 2016 2017 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 4
$8 C = personal consumption Railroads GDP = C + I Help + G + (X-M) Keep Coal- Based (trillions of Electricity 2009 $) 2016 total = $16.7 trillion $6 $4 $2 I = investment "Investment" (machinery, housing, locomotives, etc.) ~21% of GDP G = govt.* X-M = net exports (exports minus imports) $0 -$2 -$4 Goods Services "Personal consumption expenditures" ~69% of GDP Fixed nonresid. investment Fixed residential investment Source: BEA Intel. property (software, R&D, etc.) Federal State & local "Government"* ~17% of GDP Exports Imports *Excludes interest & social service programs SLIDE 5
Railroads Help Keep Coal- Based Electricity SLIDE 6
Q4 '49 - Q2 '53 Q2 '54 - Q3 '57 Q2 '58 - Q2 '60 Q1 '61 - Q4 '69 Q4 '70 - Q4 '73 Q1 '75 - Q1 '80 Q3 '80 - Q3 '81 Q4 '82 - Q3 '90 Q1 '91 - Q1 '01 Q4 '01 - Q4 '07 Q2 '09 - Q2 '17 Railroads Help Keep Coal- Average Based Annual Electricity Growth U.S. Economic Expansions Since 1949: 2.1% 2.8% 3.6% 4.0% 4.3% 4.4% 4.3% 4.9% 5.1% 5.6% Source: National Bureau of Economic Research 7.6% SLIDE 7
Weak Correlation Between Growth in Rail Traffic and Services-Related GDP 16% 12% 8% 4% 0% -4% -8% -12% -16% -20% (% change over previous year) Services-related GDP* Rail traffic** correlation = 25% '00 '02 '04 '06 '08 '10 '12 '14 '16 *Includes imports, exports, and personal consumption of services; intellectual property; and government consumption expenditures. **U.S. carloads excluding coal and grain, plus intermodal units. Rail traffic is originations and does not include the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 8
Strong Correlation Between Growth in Rail Traffic and Goods-Related GDP 24% 18% 12% 6% 0% -6% -12% -18% -24% -30% (% change over previous period) Goods-related GDP* Rail traffic** GDP sectors that generate freight were essentially in recession in 2016 correlation = 96% 2009 2010 2011 2012 2013 2014 2015 2016 2017 *Imports, exports, and personal consumption of goods; fixed residential investment; business investment in equipment & structures; government gross investment; and change in inventories. **U.S. carloads excluding coal and grain, plus intermodal units. Rail traffic is originations and does not include the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 9
Industrial Output Matters to Railroads 110 106 102 98 Rail carloads excl. coal and grain (right scale) 170,000 160,000 150,000 140,000 94 90 Total industrial output (left scale, 2012=100) 130,000 120,000 86 110,000 2011 2012 2013 2014 2015 2016 2017 Rail carloads are weekly averages. Data are seasonally adjusted. Source: Federal Reserve, AAR SLIDE 10
Slight Recent Uptick in Manufacturing Output 106 104 102 100 98 96 94 92 90 (2012 = 100) 2011 2012 2013 2014 2015 2016 2017 Source: Federal Reserve SLIDE 11
Very High Purchasing Managers Index (PMI) 60 58 56 54 52 50 48 46 44 > 50 = manuf. growing < 50 = manuf. shrinking 2012 2013 2014 2015 2016 2017 Source: Institute for Supply Management SLIDE 12
Consumer Confidence 130 120 110 100 90 80 70 60 50 40 30 Source: Conference Board (1985 = 100) 2011 2012 2013 2014 2015 2016 2017 SLIDE 13
Savings Rates Still Above Pre- Recession Levels, But Falling 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% (Personal Savings as % of Disposable Income)* *3-month moving average Impacted by income moved forward in anticipation of higher 2013 tax rates Source: Bureau of Economic Analysis Avg. 2005-2007: 3.0% Avg. 2014-2016: 5.7% July 2017: 3.5% 2011 2012 2013 2014 2015 2016 2017 SLIDE 14
Strong Correlation Between Rail Intermodal and Retail Sales $490 $480 $470 $460 $450 $440 $430 $420 $410 $400 $390 U.S. Retail Sales vs. Rail Intermodal Traffic Rail intermodal (right scale) correlation = 88% Retail sales (left scale, $ billions) 2011 2012 2013 2014 2015 2016 2017 Intermodal is weekly average originations for the month. Data are seasonally adjusted and adjusted for inflation. Source: Census Bureau, AAR 290,000 280,000 270,000 260,000 250,000 240,000 230,000 220,000 210,000 200,000 190,000 SLIDE 15
Some Good, Some Not So Good What s OK? Job growth Consumer confidence Consumer spending Inflation Housing What s Not? Manufacturing Employee earnings Govts. still broke Autos SLIDE 16
A few theories, a lot of speculation, some guesses and conflicting facts: Uncertainty Why Has Growth Remained Stifling regulations Lagging technological progress Slow? Globalization Great Recession hangover Reduced entrepreneurial spirit Baby boom retirements (deprive companies of critical experience and knowledge which undermines productivity across entire economy. Plus, means labor force grows more slowly. Could also explain weakness of wages. Replacements earn less. SLIDE 17
Slow Growth a New Normal? $18 $17 $16 $15 $14 $13 $12 $11 $10 $9 Recession July '90 - March '91 (trillions of 2009 $ annualized) Recession March '01 - Nov. '01 Recession Dec '07 - June '09 Avg. quarterly growth between recessions: After Mar. 91: 3.8% After Nov. 01: 2.8% Since June 09: 2.1% 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Source: Bureau of Economic Analysis SLIDE 18
Consumer Spending Has Been Main Driver of GDP Growth 6% Personal Consumption Expenditures (% change from previous quarter) 5% 4% 3% 2% 1% 0% 2011 2012 2013 2014 2015 2016 2017 Source: BEA SLIDE 19
Exports Improved But Still Sluggish - Dollar Still Strong $2.3 (billions of annualized inflation-adjusted 2009 $)* $2.2 $2.1 $2.0 $1.9 $1.8 $1.7 $1.6 2011 2012 2013 2014 2015 2016 2017 *Exports are ~70% goods, ~30% services. Source: BEA SLIDE 20
Railroads and Trade SLIDE 21
Finding: International Trade is Critical to Railroads Rail Revenue ($ x billions) Tons (millions) Units (millions) Freight Metrics Rail Total Freight Metrics International Percent International $75.1 $26.4 35.2% 1,879.4 511.0 27.2% 32.2 13.4 41.6% SLIDE 22
International Trade is Critical to Railroads, cont. At least 35% of US rail revenue is derived from international trade. However, this measure understates the importance of trade in the railroad portfolio. In 2014, there were at least, 329 million tons of exports handled, 171 million tons of imports moved by rail, and 11 million tons of international transit freight. Involves all major rail commodity types. At least 21 variants of import-export trade patterns found in 2014 data. SLIDE 23
Carload Movements are the Larger Component of International Trade Rail Freight Revenue From International Trade Carload Intermodal Total Import $7.2 Billion $5.2 Billion $12.4 Billion Export $9.1 Billion $4.2 Billion $13.3 Billion Transit $0.5 Billion $0.2 Billion $0.7 Billion Total $16.8 Billion $9.6 Billion $26.4 Billion SLIDE 24
Major Export Commodities Tons (millions) Largest Export Region Tons To Region Coal 100.1 East Coast 58.2 Intermodal 64.6 West Coast 37.8 Farm & Food Prod. 64.4 West Coast 42.9 Chemicals & Petrol. 37.2 West Coast 8.1 Ore, Mineral & Prod. 26.7 Great Lakes 6.3 Forest Products 14.3 East Coast 6.3 Other 22.0 - - SLIDE 25
Major Import Commodities Tons (millions) Largest Source Tons From Source Intermodal 69.8 West Coast 37.5 Chemicals & Petrol. 25.6 Canada 16.2 Forest Products 29.8 Canada 17.6 Farm & Food Prod. 14.1 Canada 7.4 Primary Metal Prod. 12.3 Canada 4.0 Vehicles & Parts 12.1 Mexico 6.7 Other 7.5 - - SLIDE 26
Key Takeaways International trade is critical to the railroad industry Over 35% of revenue, and Over 41% of units handled. Trade patterns reflect the deep integration of the three North American economies over the last two decades. Trade patterns by rail are complex and becoming more so as innovative customer logistics solutions are developed in the marketplace. Simple import-export models of trade don t reflect the complexities of modern production processes where goods may cross borders several times during production and the final product is distributed worldwide. SLIDE 27
Key Takeaways, cont. New production processes have provided new international rail movement opportunities. Canada vs. Mexico varies considerably: Mexico focus = manufactured goods moving both directions. Canada focus = import and export of both resource products and manufactured goods. SLIDE 28
And, Finally Data implies - 50,000 rail jobs, worth over $5.5 billion in wages and benefits, depend on international trade. Other significant job impacts include Jobs in ports associated with trade related rail movements, Suppliers to railroads of products needed to support international rail movements, and Secondary job impacts derived from the expenditures of rail and port employees and their suppliers. SLIDE 29
Assn. of American Railroads www.aar.org