We doubt it will be different this time. This lame duck Congress should intervene, as Congress did in 1992, if a rail strike is called.
The Civil War had ended when Joshua Lionel Cowen’s immigrant family disembarked in New York. In 1869, the biggest news of the day was the “Golden Spike,” the meeting of the Union Pacific and Central Pacific Railroads. The continent unified, a world economic power was born. As for Joshua’s birth in 1877, he arrived just in time for Edison to introduce the first electric light. The boy came of age amidst real trains and dizzying change. By the time he founded his toy train company, Lionel, LLC in 1900, passenger lines like the peerless Twentieth Century Limited symbolized American sophistication and technology. An innate inventor, Lionel’s Electric Express and its offspring rose to the level of sacred mission. Joshua devoted his life to stoking American dreams tied to the romance of the rails. By mid-century, railroads were also the emergent economy’s lifeblood. As prosperity spread, Lionel trains became a Christmas mainstay, with a train set under every tree.
Dr. Gates grew up in one of those train loving households. As a young’un, running trains around the tree always summoned: “Not too fast.” A half a lifetime on, faster train speeds in the real world would be a good thing, reducing the threat of a repeat of the post-pandemic bottlenecks that plagued the industrial supply chain.
Mining the data from the duopoly of freight lines in the Eastern U.S., CSX and Norfolk Southern is possible due to stats produced by the Surface Transportation Board. For most of the post-pandemic period, train speeds were declining for CSX (red line) and Norfolk Southern (yellow line). Not surprisingly, this invited a significant widening in current (blue line) and future delivery times (green line) across the Richmond Fed District. It wasn’t until the last few months, as the supply chain loosened up, that this lethargy lifted.
A parallel divergence occurred at the outset of the U.S./China Trade War in 2018. Vendor performance worsened and train speeds dipped as inflation took hold. “Just in Case” inventory management was test driven as procurement professionals panic-purchased safety stocks. The damage exacted by tariffs and a global manufacturing slowdown flipped the inflationary narrative to deflation. This same switch-up is echoed today in the Richmond Fed region.
A side note on the nature of the supply chain: Local always provides a lens into global. To that end, on Monday, South Korea announced its exports for the first 20 days of November shrank 16.7% year-over-year (YoY). Tellingly, for the rest of the world, exports to China collapsed by 28.3%. Taiwan’s figures were a bit better, but not by much as exports fell 6.3% YoY, more than three times worse than the estimate of -1.9%. Paralleling its Asian neighbor, exports to China and Hong Kong fell by 27% YoY.
Back on U.S. rails, trains have gotten shorter. Any Lionel train veteran knows that fewer cars on the track directly translates to a faster speed as weight weighs. It’s just physics. Those science basics are visible along CSX and Norfolk Southern lines. The “cars on line” metric tallies railcar on track traffic. For most of the past two years, this combined CSX/Norfolk Southern gauge (light blue line) has steadily grown. That trend was arrested last month pushing the annual level under 1%. In November, that rate has turned to outright contraction YoY. Though both have rebounded off their lows, twice this year, in June/July and September/October, CSX and Norfolk Southern equity prices have fallen into bear market territory, defined as 20% year to date.
With a geographic footprint that stretches from Maryland in the north to South Carolina in the south and west to as far as West Virginia, it’s no surprise that the outlook in the Richmond Fed survey compressed with rail volumes. The pandemic aside, October marked the only other time expectations for future manufacturing and service contracted simultaneously (purple and orange lines). While November bounced back a touch, both measures remain well below their respective long-run averages with future manufacturing new orders at 3 versus 31 and future service demand at -3 versus 29 long-term.
This battery of deflationary signals transmutes to peak inflation in the Mid-Atlantic. As backdrop, Prices Paid topped out in May and Prices Received apexed in June in the Richmond District. To gauge the persistence in the disinflationary pipeline, we pit demand (i.e., money) against supply (i.e., inventory sentiment) using Richmond Fed proxies Future New Orders vis-à-vis Raw Materials Inventory Sentiment. We apply our favorite normalizer — z-scores, deviation from mean adjusted for volatility – to compare the two. As you see, current and future demand-supply guides have collapsed with the former at a -1 z-score in October and November (blue line) and the latter dropping through the -3 z-score threshold over the same span (green line).
Outliers of this magnitude have the sole precedent of the Great Recession of 2007-09 and resulted in a dissipation of supply chain price pressures (red and yellow lines). That said, it’s critical to distinguish that today’s future demand-supply spread stands well south of the current one, suggesting an extended period of disinflation, if not deflation, lies ahead. Given the Federal Reserve’s lag has been compressed, the only question is how fast prices will throttle into reverse?