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Railroad Traffic and the Inventory to Sales Ratio

The Railfax report provides a barometer of economic health by tracking the freight traffic for all North America railroads. This information provides insight into the amount of commodities and goods that are being shipped across the country, which coupled with an analysis of inventories to sales, can be an indication of increasing or decreasing consumer demand.

The following chart depicts the 13-week moving average for rail traffic (a lagging indicator since it is an average of the last 13 weeks) along with the year-over-year change in traffic (closer to a coincident indicator since it is describing the relative performance from one year to the next).

Note how much the rate of growth for railroad traffic has slowed from the middle of 2010 throughout the first quarter of 2013 (as depicted by the green line). This   declining growth off of the recession lows corresponds with the slow economic recovery we have experienced thus far.

In the following chart, note the recent depth of the seasonal decline following the year-end holiday buying spree (indicated by the red arrow). It is larger than the last couple years, largely due to the anticipation of the sequester and tax increases. On a positive note, the overall average is beginning to trend upwards though the pace of growth is tepid at best. The important question is whether this upward trend remains intact or begins to fade. 


Given the backdrop of the flat to slowly growing rail traffic data, it is important to compare this information against the inventories of businesses to see if demand is keeping pace with supply. The inventory to sales ratio (see chart below) has been quietly ticking upwards, a sign that inventories are growing faster than sales or that sales are beginning to slow.

If the culprit to the rising ratio is indeed slowing sales, the timing fits well with the recent decline in earnings growth. Nevertheless, we stand at or near all time highs for the stock market, so the risk of a market correction is rising. 

Written By: Joshua Ungerecht

coincident indicator, Inventory to Sales Ratio, lagging indicator, railroad traffic, Sequester, Stock Market