By Wolf Richter, Wolf Street

Total US freight rail traffic, as measured in carloads and intermodal units, fell 6.1% in the week ended October 8, from the same week last year, the Association of American Railroads reported today. It was down 10% from the same week two years ago!

Both of its components were down: Carloads – transporting oil, coal, grains, chemicals, and the like – fell 5.9% in the week, to 264,165 loads. Intermodal (containers and trailers), which accounts for about 46% of total traffic, fell 6.4% from a year ago, and 6.5% from two years ago.

This comes after an already dreary September, when total freight traffic was down 4.8% from September last year, with carloads down 5.4% , and intermodal down 4.2%.

“Rail traffic in September was more of what we have come to expect this year: big declines in energy related products, continued weakness in intermodal and most other export markets, but with some strength in grain,” the AAR report said. “The fact is, in many of their markets, railroads are facing significant market uncertainties.”

These “significant market uncertainties” – actually “certainties” would be a better word – come in several packages:

The decline in car loads is mostly due to two big factors:

The ongoing collapse of coal shipments. Power generators have been switching to natural gas and renewables, at the expense of coal. This trend started years ago when the price of natural gas collapsed and when power generators began building large utility-scale renewables facilities, particularly wind, in Texas, California, and other states.
The total collapse of crude oil shipments. This started two years ago, when the oil bust began to bite. In the latest week, shipments of petroleum and petroleum products were down nearly 70% from the same week two years ago!
A more recent addition to the freight rail problem is the decline in intermodal traffic.

Intermodal had been the big hope for railroads. As oil and coal shipments were collapsing, intermodal was growing, and the hope was that it would be able to compensate for the decline in coal and oil shipments. But that hope fell apart in Q4 2015, when intermodal booked its first year-over-year decline (-9%) since the Financial Crisis.

This was followed by an uptick (+1%) in Q1 and by two back-to-back year-over-year declines in Q2 and Q3 (about 5% each).

It’s not just a blip. Year-to-date, US railroads reported a total volume decline of 6.9% from the same period last year, with car loads down 10.4% and intermodal units down 3.3%. Coal shipments, by far the largest category, accounting for about 30% of total carloads, plunged 25%. Petroleum and petroleum products shipments fell 22%, forest products 7.8%….

The only bright spots in terms of carloads, year-to-date: grains (+5.6%), motor vehicles (+2.7%), chemicals (+1.7%), and “other,” the smallest category (+16.7%).

But one of these bright spots, motor vehicles, which accounts for over 7% of total carloads, is turning into the next brake shoe to drop.

Auto sales hit a record in 2015, after cheap-debt-fueled increases year after year. But in September, unit sales fell from a year ago. Year-to-date, sales are up merely 0.5%, on strength earlier this year. Inventories at dealer lots are growing. Manufacturers are piling on incentives to move the iron. Ford will close its Mustang plant for a week to deal with oversupply. The industry has been talking about a looming “car recession” for months. And unless a miracle happens, auto shipments are going to follow auto sales.

So the decline in intermodal traffic is very unwelcome. Intermodal faces a combination of different challenges: Shippers seeing less than stellar demand in the US and overseas; and fierce competition from the trucking industry.

Diesel prices have fallen over the past two years. Spot rates that trucking companies charge have dropped too. And shippers have come to see a price advantage in shipping their merchandise by truck rather than by rail. In that vein, the AAR estimates that truck freight has increased 3.5% this year through August.

To deal with these “significant market uncertainties,” as the AAR put it, railroads have been cutting costs. They’re laying off people. They’re slashing investments. They’re working on efficiencies, such as increasing train speeds, given the reduced traffic (particularly of slower-moving oil trains).

And they’re idling engines on various tracks around the country. Sightings of these long lines of hundreds of engines have become more common. In May, I reported on the majestic sight of 292 Union Pacific engines parked in the Arizona desert [Freight Rail Traffic Plunges: Haunting Pictures of Transportation Recession].

Investors, however, have piled into railroad stocks since the February low – along with just about everything else out there – hoping the glory days are back, or hoping that QE4 will commence soon, or hoping at least for a nudge from the Fed, or whatever. For example, Union Pacific shares have jumped 42% since February, but they’re still down nearly 20% from the February 2015 high.

As an industry, North American Class 1 railroads – which the AAR defines as line haul freight railroads with revenues of over $476 million – are much smaller than trucking. According to the AAR, these railroads employed about 169,000 well-paid people in 2015, compared to about 1.8 million long-haul truckers (not counting other employees at trucking companies). And for those who want to know, there are over 26,000 locomotives in service at Class 1 railroads, including a couple of thousand or so parked on sidings around the US.

But even trucking companies are cutting costs and slashing investments as the transportation recession exacts its pound of flesh.

Read the original article on Wolf Street. Copyright 2016. Follow Wolf Street on Twitter.

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