Inside This Issue
· Canary in the Mine? Norfolk Signals Signs of Decline
· Or Will All Be Fine? UP’s Outlook Sounds Benign
· Engineers Vote Yes: CSX-BLET Contract A Done Deal
· Wage Rage: UP’s Vena Says Rivals Set Costly Pay Pattern
· Better than Feared: IM Demand Has Persevered
· From Wings to Rails: NS Names Ex-Air Chief as Next Board Chair
· Are Tariffs Inflicting Inflation? No, Not Yet. But Stay Tuned.
· Great for Rail, But a Fairy Tale? More Chatter About Transcon Mergers
Track Talk
“Okay, so first two months of the quarter in the bag, how do we think June is progressing here? We are starting to see a little bit of softness; more than what we expected probably.”
- Norfolk Southern CFO Jason Zampi
The Latest
· “A little bit of softness… more than we expected.” With those words, Norfolk Southern raised fears that—uh oh—an economic downturn might be starting. The softness, it said last week, was “broad-based” and significant enough to be “definitely monitoring.” A false alarm? Maybe. Union Pacific, also providing commentary last week, didn’t flag anything too unusual. Large parts of its business seem to be doing just fine, as you’ll read below. In addition, railroad partners like J.B. Hunt and Schneider say the intermodal business—despite a plunge in west coast imports (that should soon reverse)—is holding up better than expected.
· The latest national data, meanwhile, suggests the economy is still growing at a healthy pace, underpinned by low unemployment and resilient consumer spending, especially among higher-income Americans. Inflation fears too, are so far unrealized, as the latest CPI reading makes clear (see below). The Atlanta Fed, meanwhile, expects GDP to grow a robust 3.8% in the current April-to-June quarter. However, GDP readings—remember the first quarter’s 0.2% contraction—have been skewed by the impact of large swings in inventories triggered by tariff policies.
· How to reconcile all this? There are two predominant sentiments regarding the economy and future rail freight demand. One is that tariffs are proving far less damaging than feared, and might even wind up lower than many feared, based on a pattern of last-minute White House delays, rollbacks, and retreats. Very broadly speaking, Corporate America’s latest commentary reveals ongoing tariff concern for sure, but also confidence that their customers are still spending, and that the firms themselves will manage through the tariffs without too much disruption.
· The other narrative though, is gloomier. Tariffs, the still-fearful say, haven’t laid their fangs into the economy yet. But they will. Thanks to built-up inventories, Americans are still consuming goods imported at pre-tariff costs. This will change. Tariffs, furthermore, are set to rise enormously over the next two months unless new trade deals are reached—many have been promised, but only one tentative deal (with the U.K.) has yet to be realized. Small businesses, meanwhile, sound more distressed and concerned than Corporate America. Even JPMorgan’s Jamie Dimon, at an event last week, remarked, “I think there’s a chance real numbers will deteriorate soon… maybe in July, August, September, October, you’ll start to see it have an effect.”
· So, is Norfolk Southern a canary in the coal mine? Does its detection of softness signal trouble? Or is this much ado about nothing? The drama continues…
Other Developments
· Switching gears to railroad labor, CSX’s locomotive engineers ratified their new five-year contract. This was the deal announced last month, that CSX negotiated with the BLET Teamsters union. It covers some 3,400 workers (roughly a fifth of CSX’s front-line workforce). And it leaves conductors, represented by the SMART-TD union, as the only CSX work group without a new contract—that one is taking more time presumably because CSX is pushing for a “single-system” agreement that applies across all territories and sub-groups.
· Do note that the BLET ratification vote was close—only 54% voted yes. Importantly, it’s the BLET’s first deal with any Class I railroad so far this negotiating round. CSX, under CEO Joe Hinrichs, appears most determined to achieve better labor relations, and seemingly more aggressive than others in quickly reaching new deals. As you’ll read below, Union Pacific’s Jim Vena has a more cautious approach, criticizing other railroads for being too quick to grant 4% annual wage increases.
· The BLET separately credited its lobbying efforts for helping to preserve federal funding for key rail programs. The Trump administration’s proposed budget for the next fiscal year would “keep funding levels the same for most key rail programs and agencies.” (see graphic below). “Our pushback has made Congress and the Administration think twice about attacking the programs and agencies BLET cares about.”
· L.B. Foster, a railroad engineering firm, also discussed federal funding for railroad projects, in its case at an investor event hosted by Three Part Advisors last week. Here’s a graphic it presented about CRISI grants that shortlines, in particular, will find relevant:
· Norfolk Southern named a new board chairman to replace Claude Mongeau. It’s former Amtrak and Delta Air Lines chief Richard Anderson.
Publisher’s note: More than 20 years ago, I began writing a newsletter called Airline Weekly, which I still co-author (I sold it to a company called Skift in 2018). I’ve also co-authored a history of Delta Air Lines, in which Richard Anderson plays a prominent role. He’s today widely considered an industry giant, having orchestrated the successful merger of Delta and Northwest Airlines in 2008. Anderson recounted his airline adventures in a recent conversation on the Airlines Confidential podcast. -Jay
The Economy
· All eyes were on the consumer price index (CPI) last week, published monthly by the Labor Department’s Bureau of Labor Statistics (BLS). Did May’s reading show that tariffs are causing inflation? No, nothing yet. The index rose just above the Federal Reserve’s 2% target, pushed downward by cheaper energy prices. Among major categories, only monthly housing costs are rising at a rate well above 3%. A few sub-categories like auto insurance, hospital care, childcare, and eldercare were uncomfortably high. [Note that the BLS warned of staffing shortages that might have affected the quality of the data]. But again, based on these latest figures, the overall rate of inflation is pretty low—low enough for the Fed to at least consider dropping overnight interest rates when it meets this week—Fed chairman Powell will reveal the board’s decision on Wednesday.
· But are we still experiencing the calm before the storm? Does tariff inflation still loom? The current quiet, in fact, might just reflect a buildup in product inventory before tariffs took effect. Companies, in other words, might not have to raise prices until they start selling goods imported after the tariffs started. Others might be just temporarily swallowing lower profits or even losses while they wait to see where tariffs ultimately end up. In some cases, foreign exporters might be temporarily swallowing the tariff costs. In still other cases, firms are holding back on price hikes—for now—to avoid political retribution. Walmart, most notoriously, was directly threatened by President Trump when it suggested price hikes. Amazon had a similar experience. The inflation story doesn’t seem over.
· Though oil prices remain well below last year’s levels, they jumped last week after Israel attacked Iran, a major oil producer. The conflict injects further geopolitical volatility into the global economy.
· Back on the tariff front, President Trump suggested the possibility of significantly higher auto tariffs. This as the White House negotiated a resumption of Chinese rare earth metal exports, which U.S. automakers said they couldn’t build vehicles without. China’s total exports to the U.S., by the way, plummeted 35% y/y last month.
· As a reminder, July 8th will be the last day of a three-month pause on the President’s “reciprocal” tariffs, applied to countries (and even Penguin colonies) throughout the world. The situation with China is less clear as an August 11th deadline nears. A social media post by President Trump suggested the tariff rate will now be 55% going forward. But this is from the Wall Street Journal on Thursday: “The sides met this week in London to reaffirm the May pact and resolve issues related to export controls, but it remains unclear if that tariff deadline, set for Aug. 12, is still operative. ‘We’ll see,’ [Treasury secretary] Bessent said when The Wall Street Journal asked about the tariff deadline, declining to say more.”
· Walmart’s CFO shared some of his latest thoughts at an investor event last week. “The consumer,” he said, “has been very consistent.” He described February as weaker than expected, partly because of bad weather but also “negative consumer sentiment around… looming tariffs, immigration noise.” March was “more in line with what we expected. And then with Easter moving to April, we saw really strong performance around that. And we’re off to a good start this [fiscal] quarter [which began in May].” Consumers, he added, have been shifting some spending toward food and away from goods. Higer-priced items—he cited barbecue pits—are expected to be most affected by tariffs. “We’re going to sell fewer of them.” He expressed hope that, “We can get to a resolution in a short period of time around the level of tariffs that will be implemented, and that will become the new normal that we’ll need to navigate… 60% of our suppliers in our U.S. business are small businesses. And so, it’s important for us to work with our suppliers and make sure that they’re viable going forward, too, and that we can work together with them.” Walmart is working with suppliers to alter their supply chains, helping them buy more domestic steel and aluminum, for example.
Wells Fargo Event Highlights
Norfolk Southern
· A sign of trouble? A crack in the armor? A first signal of economic contraction? Maybe. Maybe not. But Norfolk Southern said last week it’s “starting to see a little bit of softness; more than we expected.” In the week that ended on June 7th, NS moved about 138k carloads of freight. This was up 1% versus the equivalent week last year. But it was down from levels carried during most of May. The softness, explained CFO Jason Zampi, has been “broad-based” across different products. “We’re keeping our eye on it. It’s something that we’re definitely monitoring.” The company, meanwhile, continues to watch for “any leading indicators that point to any further degradation.”
· Zampi called out three merchandise categories in particular where weakness seems to be building: Steel, grain, and construction aggregates. For the year so far though,
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