WASHINGTON — Railroads are winding down the final weeks of 2024 with support from strong international intermodal volumes, a healthy grain harvest, and modest GDP growth at 4% year over year. Economically, inflation is still a problem, as groceries cost more than they did four years ago. Unemployment hangs around 4% and fuel prices are lower than they were last year, but still higher than before the pandemic. Mortgage rates are on the rise again as the cost of borrowing remains high.
Even with the election outcome settled, macroeconomic issues persist, and uncertainty is likely to continue for the foreseeable future. I do have observations about what President-elect Donald Trump’s priorities could mean for railroads’ business, but I preface that I am not an economist, nor do I claim to be an expert in any of the forces pulling on our economy, and my comments are nonpartisan. These are my thoughts.
Tariffs and what they mean for carloads, intermodal
The President-elect has indicated strong support for domestic manufacturing, levying tariffs on importers to incentivize companies to invest and manufacture in the U.S. This could lead to more output in the U.S., reducing foreign dependence on items like consumer goods, pharmaceuticals, and furniture the U.S. imports from countries like China. I don’t expect this to result in a remarkable shift in domestically produced goods moving by rail, but the idea here is that throughout Trump’s second term, perhaps more U.S. investment will create carload opportunities. I think 2025 is too soon, though.
Also, any carload gains potentially resulting from more domestic manufacturing would likely be overshadowed by less international intermodal import traffic. If tariffs are implemented early in the new administration, U.S. railroads could see softer international intermodal volumes, whereas the benefits of increased domestic manufacturing wouldn’t be seen in increased merchandise carloads until the latter half of the term.
Energy policy doesn’t necessarily mean more tank cars, coal shipments
It’s widely anticipated the new administration will loosen regulation on energy and environmental policy. This could boost natural gas production and loosen regulations around coal. Increasing natural gas supply could soften coal prices, making natural gas more favorable than coal for domestic utility consumption. Utilities without the ability to use natural gas may ship slightly more coal tons under the new administration given its bullish view on coal. Price is more important than policy and many utilities and energy producers will remain committed to their long-term climate objectives.
Where railroads may win is through decreased fuel costs. For example, Union Pacific spent $2.1 billion in fuel in pre-pandemic 2019 when U.S. No. 2 diesel fuel retail prices averaged $3.05 per gallon. In 2023, UP spent $3.4 billion when diesel fuel retail prices averaged $4.21 per gallon. Railroads typically procure fuel below these retail rates, but the trendline is the same. While cheaper diesel fuel will decrease railroad expenses, it will also decrease fuel-surcharge revenues railroads tack onto carload rates.
Domestic intermodal an area to watch
Domestic intermodal has been lackluster for many quarters, due primarily to too much capacity in the over-the-road truck market and little incentive for domestic shippers to choose rail. If economic sentiment improves in the U.S. and consumers begin spending more on the bullishness of Trump’s pro-America agenda, this could drive economic activity, potentially giving a jolt to truckers and the so-called freight recession. This isn’t necessarily a volume jolt to railroads, but it’s an opportunity for railroads to find creative lanes of business that work for its customers in a pro-America-everything backdrop. I want to closely follow this and glean what I can from intermodal experts and railroads in 2025.
Housing and construction
America still needs to build millions of homes to recover from its housing deficit. Eventually, new homes will start being built. Falling interest rates will help spur real estate activity, but I don’t expect this to move quickly. I am optimistic there will be more lumber and drywall activity in 2025 given the election’s outcome, and with inflation waning, but how much railroads benefit is to be determined. Tariffs on Canadian softwood lumber could boost U.S. production, but how much market share will railroads originate versus trucks in this scenario?
Aggregates and other minerals should continue a strong performance in 2025 with a backlog of infrastructure projects in full swing from the Bipartisan Infrastructure Deal injecting $1.2 trillion into the economy. I would expect various types of aggregates, cement, and other construction materials to perform well, further supported by Trump’s pledge for domestic investment and easier regulation.
Also standing to benefit from wide-ranging tariffs are American steel producers. Steel prices have been soft since the pandemic’s outset, due to a slowdown in demand, caused in part by high interest rates, and a surplus of domestic production and imported steel. Incentivizing domestic steel production, supported by strong manufacturing demand, could boost activity.
Also, lower interest rates, a stronger dollar, and a more optimistic view on the American economy could make consumers more apt to purchase vehicles, also boosting demand for steel.
Where do we go from here?
All things considered, I still believe there’s a lot of uncertainty going into 2025 and I’m eager to study more about economics and railroads’ ongoing role in the U.S. economy, particularly under an administration focused on America first. No one seems to be making bold assumptions, nor will I be the first, but 2025 should be interesting, and hopefully railroads can pivot quickly to new opportunities.
I’ll reiterate again that I’m no economist and while this column is typically a collection of my thoughts, this time I’m asking for your thoughts and ideas and welcome your views. You can contact me at chase.gunnoe@outlook.com.
— Carload Considerations is a monthly Trains News Wire commentary series. It discusses the freight rail industry, commodities, and economic trends. Its views are the opinion of its author with no particular emphasis on a specific railroad or shipper.
