AAR Rail Time Indicators - August 2012

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Rail Time Indicators

A Review of Key Economic Trends

Shaping Demand for Rail Transportation

Policy & Economics Department

Association of American Railroads

Washington, D.C.

August 3, 2012



Rail Time Indicators is issued monthly by the Policy and Economics Department of the

Association of American Railroads. It is free of charge.

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If you have questions or comments about the content of Rail Time Indicators ,please contact Dan Keen ([email protected], 202-639-2326)

or Shannon Stare ([email protected], 202-639-2322).

Copyright 2012 by the Association of American Railroads. Reproduction or retransmittal ofRail Time Indicators within a company for internal use is allowed, as is reasonable redistributionoutside a company (for example, passing it on to someone you think might be interested in it).

Unless approved by the AAR, reproduction or retransmittal for commercial use is prohibitedexcept for short excerpts or quotations. Uploading of Rail Time Indicators to a public web site is

prohibited unless approved by the AAR.

All media inquiries should be directed to Holly Arthur ([email protected], 202-639-2344).

The last six editions of Rail Time Indicators are available on the AAR web site here.

Rail traffic data in Rail Time Indicators are sometimes presented on a seasonally adjusted basisand sometimes on a non-seasonally adjusted basis. Because of the nature of the AAR’s weeklyrail traffic data and the nature of rail traffic (e.g., daily data are not available; some months havefour weeks of data and some have five; holidays may be in one rail traffic month one year and ina different month the next; rail traffic varies by the day of the week; some commodity categories

can exhibit wide swings in carloads from month to month for reasons unrelated to seasonalvariations; the weather can have significant effects on traffic), the seasonal-adjustment processfor rail traffic is not completely precise. Seasonally adjusted rail traffic data should be

considered a complement to, rather than a replacement for, unadjusted rail traffic data.

Information in Rail Time Indicators is obtained from sources believed to be reliable. However,the Association of American Railroads makes no representations as to the accuracy or

completeness of such information and assumes no liability for errors or omissions.

http://www.aar.org/NewsAndEvents/Rail-Time-Indicators.aspx

http://www.aar.org/NewsAndEvents/Rail-Time-Indicators.aspx



`Rail Time Indicators – August 3, 2012 Page 1 of 39

SUMMARY OF MOST RECENT DATA

Economic Indicator Most Recent Data

U.S. Freight Rail Traffic (p. 2) Not Seasonally Adjusted: Total carloads 0.7%, carloads excludingcoal flat, carloads excluding coal and grain 1.4%, and intermodal 5.6% in July 2012 compared with July 2011. Highest weekly intermodal

average of any July in history.

Seasonally Adjusted: Carloads in July 2012 flat compared with June2012; intermodal in July 2012 2.5% from June 2012.

Canadian Freight Rail Traffic(p. 4)

Not Seasonally Adjusted: Carloads in July 2012 1.7% over July 2011;intermodal in July 2012 5.8% over July 2011.

Seasonally Adjusted: Carloads in July 2012 0.3% from June 2012;intermodal in July 2012 4.0% over June 2012.

Gross Domestic Product(p. 18)

1.5% in Q2 2012, according to the BEA’s first preliminary estimatereleased on July 27. Down from 2.0% in Q1 2012 and 4.1% in Q4 2011.

Purchasing Managers Index(p. 21)

to 49.8 in July 2012 from 49.7 in June 2012. New orders to 48.0 inJuly 2012 from 47.8 in June 2012.

Non-Manufact. Index (p. 21) to 52.6 in July 2012 from 52.1 in June 2012.

Manufacturing Inventoriesand Sales (p. 22)

Manufacturing sales 1.1%, manufacturing inventories 0.1%, andinventory-sales ratio 1.2% in June 2012 compared with May 2012.

Industrial Production (p. 24) Overall industrial output 0.4% in June 2012 over May 2012.Manufacturing output 0.7% in June 2012 from May 2012.

Capacity Utilization (p. 26) to 78.9% in June 2012 from a revised 78.7% in May 2012.Manufacturing to 77.7% in June 2012 from 77.3% in May 2012.

Employment andUnemployment Rate (p. 28)

163,000 net new jobs created in July 2012, up from a revised 64,000 inJune. Unemployment rate up to 8.3% in July 2012.

Railroad Employment (p. 30) 611 to 163,159 employees in June 2012 from a revised 162,548 inMay 2012. Highest employment level since October 2008.

Consumer Confidence (p. 31) Conference Board index to 65.9 in July 2012 from 62.7 in June 2012.First increase after four straight declines. Thomson Reuters/Universityof Michigan index to 72.3 in July from 73.2 in June.

Retail Sales (p. 32) 0.5% ($1.9 billion) in June 2012 from May 2012; third straight decline.

Light Vehicle Sales (p. 34) to 14.0 million (annualized) in July 2012 from 14.3 million in June.

Housing Starts (p. 35) to 760,000 annualized in June 2012 from 711,000 in May 2012;highest since October 2008.

Consumer Price Index (p. 37) Unchanged in June 2012 from May 2012; 1.7% for the year endingJune 2012.

Rail Freight Cars in Storage(p. 39)

to 314,971 on August 1, 2012 (20.6% of the fleet), down 2,710 carsfrom July 1, 2012. First decline after nine straight monthly increases.




U.S. AND CANADIAN FREIGHT RAILROAD TRAFFIC

What is it and why is it important?

The Association of American Railroads (AAR) releases its Weekly Railroad Traffic report everyThursday morning. The report contains rail traffic data for the previous week. Weekly data areaggregated into monthly totals in Rail Time Indicators . Railroads reporting to the AAR togetherhandle about 95% of total U.S. and Canadian freight rail traffic.

AAR rail traffic data are reported as carloads or as intermodal units. Carload traffic is classifiedinto one of 20 different commodity categories and is carried in a variety of rail car types ( e.g ., tankcars, covered hoppers, gondolas, boxcars, etc.). A unit of rail intermodal traffic is either ashipping container (currently about 87% of U.S. rail intermodal traffic) or a truck trailer (about13%) carried on a railroad flat car. Intermodal is not included in carload figures. Commoditydetail on the freight inside the container or trailer is not available.

Freight railroading is a “derived demand” industry: demand for rail service occurs as a result ofdemand elsewhere in the economy for the products railroads haul. Thus, rail traffic is a usefulgauge of broader economic activity, especially of the “tangible” economy.

What are the latest numbers for U.S. railroads?

U.S. railroads originated 1,103,733 total carloads in July 2012, down 0.7% (7,787 carloads)from July 2011. It was the sixth straight year-over-year monthly decline, but at 0.7% it was thelowest percentage decline in those six months (see chart below right).

U.S. intermodal traffic was up 5.6% (50,431 containers and trailers) in July 2012 over July2011 to 946,071 units, its 32

ndconsecutive year-over-year monthly increase. Average weekly

intermodal volume in July 2012 was 236,518 units, the highest of any July in history (see thecharts on the top of the next page).

Coal accounts for far more rail carloads than any other commodity. In July 2012, coal carloads

were down 1.7% (7,945 carloads) from July 2011 (see the charts on the top of page 9). Coalaccounted for 42.4% of U.S. carload traffic in July 2012, its highest share since January 2012.

Chemicals and grain have the second and third highest carload volumes for U.S. railroads. U.S.chemical carloads totaled 115,028 in July 2012, down 3.1% (3,674 carloads) from July 2011 —their fifth year-over-year monthly decline in 2012’s seven months (see the charts on the top ofpage 10). U.S. carloads of grain were down 10.0% (7,860 carloads) in July 2012, their 13th consecutive year-over-year monthly decline (see the charts on the top of page 11).

240,000

260,000

280,000

300,000

320,000

340,000

360,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Weekly U.S. Rail Carloads: All Commodities(not seasonally adjusted)

2006 (peak year)

2009

2012

Data are weekly average originations for each month, exclude the U.S. operations of CN andCP, and reflec t revisions to original reporting. Source: AAR Weekly Railroad Traffic

2010

2011

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

% Change in Total U.S. Rail Carloads From SameMonth Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, exc lude U.S. operations of CN andCP, and reflec t revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012

July 2012 was down 0.7% from July 2011 and down 1.7% from July 2010.




U.S. rail carloads excluding coal totaled 638,288 in July 2012, virtually unchanged (up 158carloads) from July 2011. Excluding coal and grain, U.S. rail carloads were up 1.4% (8,018carloads) in July 2012 over July 2011 (see the charts on the middle and bottom of page 12).

Commodities with gains on U.S. railroads in July 2012 included petroleum and petroleumproducts (up 13,368 carloads, or 47.2% — see the charts in the middle of page 14, whichinclude movements by Canadian railroads); motor vehicle and parts (up 9,317 carloads, or23.3% — bottom of page 14); and food products (up 2,297 carloads, or 9.9%).

In addition to coal, grain, and chemicals, commodities with carload declines in July 2012 on U.S.railroads included metallic ores (down 6,182 carloads, or 16.2% — see the charts on the bottomof page 15) and iron and steel scrap (down 5,029 carloads, or 26.9%).

U.S. carloads of “industrial products” — an aggregation (admittedly somewhat arbitrary) ofchemicals; paper; primary metal products; autos and auto parts; stone, clay and glass products;metallic ores; and crushed stone, gravel, and sand — were down 0.2% (884 carloads) in July2012. It’s the first time that carloads of this group of commodities were down since November2009 (see the charts on the top of page 13). The big drop incarloads of metallic ores was largely to blame.

The table on page 6 has more commodity detail for U.S.railroads. Eight of the 20 commodity categories tracked bythe AAR saw carload gains in July 2012 year over year, thelowest such number since May 2011 (see table at right). Bycontrast, 13 of the 20 categories are up year-to-date in 2012compared with 2011.

That can only happen, of course, if several commodities thatare up year to date were down in July. The chart on the top ofthe next page shows the percentage change in U.S. railcarloads by commodity in 2012 versus 2011 for 1) July onlyand 2) January through June in aggregate. For severalcommodities, carloads fell in July but were up in Januarythrough June. For example, carloads of iron and steel scrap(generally used to produce new steel) were up 1.8% in Januarythrough June, but were down 26.9% in July. Likewise,carloads of waste and nonferrous scrap (consisting largely ofwaste paper and cardboard and municipal debris) were up 5.7% in January through June, butwere down 6.0% in July.

Several other commodities saw carload growth in July, but at rates lower than they grew inJanuary through June. For example, carloads of crushed stone, sand, and gravel were up 8.6%in January to June, but up only 0.5% in July.

Month 2010 2011 2012

Jan 11 15 11Feb 13 15 14Mar 16 15 12Apr 19 9 11May 19 8 13Jun 17 14 9Jul 13 12 8Aug 16 12Sep 14 13Oct 15 12

Nov 13 13Dec 16 16

*Out of 20. Source: AAR

# of AAR Commodity Categories*With Year-Over-Year Gains

For U.S. Railroads

170,000

180,000

190,000

200,000210,000

220,000

230,000

240,000

250,000

260,000


Average Weekly U.S. Rail Intermodal Traffic(not seasonally adjusted)

2006 (peak year)

2009

2012

Data are weekly average originations for each month, exclude U.S. operations of CN and CP, andreflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2010

2011

-25%

-20%

-15%

-10%

-5%0%

5%

10%

15%

20%

25%

% Change in U.S. Rail Intermodal Traffic From SameMonth Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, e xclude U.S. operations of CN andCP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012

July 2012 was up 5.6% over July 2011 and up 7.0% over July 2010.




To be sure, some commoditycategories bucked these trends — forexample, carloads of motor vehiclesand equipment were up 23.3% in July,compared to an 18.6% gain inJanuary through June.

Coal and grain carloads have beendown throughout 2012 for reasonsthat have little to do with the conditionof the economy. But for carloads ofother more economically sensitivecommodities, we get a mixedmessage in July. While somecommodities (e.g., lumber and woodproducts, autos and auto parts) stillsaw strong growth in July, otherseither grew more slowly or actually fell. It remains to be seen if July was just a blip on the road tomore rapid growth or a sign that something more serious might be going on.

U.S. carload volume in 2012 through July was 2.6% (223,342 carloads) lower than it was in

2011 through July, 16.2% lower than it was in 2006 through July (the peak year to date), and6.9% higher than it was in 2009 through July. Carload volume bottomed out in 2009 due to therecession — see the chart below left.

U.S. intermodal volume in 2012 through July was 3.6% (243,972 containers and trailers)higher than it was in 2011 through July, 0.4% higher than it was in 2006 (the peak year to date),and 25.7% higher than it was in 2009. Intermodal volume too bottomed out in 2009 due to therecession. See the chart below right — the 2006 and 2012 lines overlap almost completely.

Seasonally adjusted total U.S. rail carloads were unchanged in July 2012 compared with

June 2012. Seasonally adjusted U.S. rail intermodal traffic was down 2.5% in July 2012from June 2012, mainly because seasonally adjusted intermodal volume in June 2012 wasexceptionally high (see the charts on page 16).

What are the latest numbers for Canadian railroads?

Canadian railroads (including their substantial U.S. operations) originated 304,178 carloads inJuly 2012, an average of 76,045 carloads per week and up 1.7% (5,135 carloads) over July2011.

-30% -20% -10% 0% 10% 20% 30% 40% 50%

Waste & nonferrous scrap

Stone, clay & glass prod.

Nonmetallic minerals

Crushed stone, gravel, sand

Motor vehicles & parts

Iron & steel scrap

Primary metal products

Coke

Metallic ores

Pulp & paper products

Lumber & wood products

Coal

Petrol. & petr. products

Chemicals

Food products

Grain mill products

Grain

Jan-June 2012 vs.

Jan-June 2011

July 2012 vs. July2011

% Change in U.S. Rail Carloads

0

1

2

3

4

5

6

7

8

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Week

Year-to-Date U.S. Rail Intermodal Traffic Through July(millions)

2006

2009

2011

2012

Data are based on originations, are not seasonally adjusted, exc lude U.S. operations of CN andCP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

U.S. intermodal volume in 2012 through July was 3.6% higher than it was in 2011 through July, 0.4% higher

than it was in 2006 (the peak year to date) and 25.7% higher than it was in 2009 (when intermodal volume bottomed out due to the recession).

0

1

2

3

4

5

6

78

9

10

11

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Week

Year-to-Date U.S. Rail Carload Traffic Through July(millions)

2006

2009

2011

2012

Data are based on originations, are not seasonally adjusted, exc lude U.S. operations of CN andCP, and reflect revis ions to original reporting. Source: AAR Weekly Railroad Traffic

U.S. carloadvolume in 2012 through July was 2.6% lower than it was in 2011 through July, 16.2% lower than it was in 2006 (the peak year to date) and 6.9% higher than it was in 2009 (when intermodal volume bottomed out due to the recession).




Canadian intermodal volume in July 2012 was up 5.8% (11,624 units) over July 2011 to 211,764 containers and trailers, an average of 52,941 per week and the second highest weeklyaverage (behind June 2012) for any month in history forCanadian railroads.

Year-to-date Canadian carloads were up 3.2% (71,038carloads) in 2012 through July compared with 2011 throughJuly; year-to-date Canadian intermodal volume was up 7.2%(101,721 containers and trailers).

12 of the 20 carload commodity categories tracked by theAAR saw increases on Canadian railroads in July 2012compared with July 2011. Leading the way was petroleumand petroleum products (up 6,623 carloads, or 37.3%),coal (up 5,070 carloads, or 15.5%), and motor vehicles andparts (up 3,466 carloads, or 25.0%).

Commodities showing carload declines on Canadianrailroads in July 2012 included farm products excludinggrain (down 3,607 carloads, or 32.3 percent), metallic ores(up 3,439 carloads, or 6.2%), grain (down 2,500 carloads, or6.9%), and chemicals (down 1,834 carloads, or 4.4%). Seethe table on page 7 for more commodity detail.

Seasonally adjusted Canadian rail carloads in July 2012 were down 0.3% from June 2012,while seasonally adjusted intermodal volume in July 2012 was down 4.0% from June 2012(see the charts on the bottom of page 16).

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000


Avg. Weekly Canadian Rail Carloads: All Commodities(not seasonally adjusted)

2006 (peak year)

2009

2012

Data are weekly average originations for each month, include CN and CP (including their U.S.operations) , and reflec t revisions to original reporting. Source: AAR Weekly Railroad Traffic

2010

2011

-35%-30%-25%-20%-15%-10%-5%0%5%

10%15%20%25%30%35%40%

% Change in Total Canadian Rail Carloads FromSame Month Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, include CN and CP (including theirU.S. operations), and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012


34,000

38,000

42,000

46,000

50,000

54,000

58,000


Average Weekly Canadian Rail Intermodal Traffic(not seasonally adjusted)

2008

2009

2012

Data are based on originations, include CN and CP (including their U.S. operations), andreflec t revisions to original reporting. Source: AAR Weekly Railroad Traffic

2010

2011 (peak year)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%20%

25%

30%

% Change in Total Canadian Intermodal Traffic FromSame Month Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, include CN and CP (including their U.S.operations) , and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012


Month 2010 2011 2012Jan 14 9 15Feb 13 13 18Mar 17 9 14Apr 17 10 11May 16 9 9Jun 14 13 10Jul 16 13 12Aug 16 14Sep 15 13Oct 16 16Nov 15 18Dec 19 15

*Out of 20. Source: AAR

# of AAR Commodity Categories*

With Year-Over-Year Gains

For Canadian Railroads




400,000

425,000

450,000

475,000

500,000

525,000

550,000

575,000

600,000

625,000


Average Weekly U.S. Rail Traffic:Total Carloads + Intermodal Units

2006 (peak year)

2009

2012

Data are weekly average originations for each month, are not seasonally adjusted, exclude U.S.operations of CN and CP, and reflect revisions to original reporting. Source: AAR

2010

2011

-25%

-20%

-15%

-10%

-5%

0%5%

10%

15%

20%

% Change in U.S. Rail Carloads + Intermodal UnitsFrom Same Month Prev. Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012


Commodity July 2012 July 2011 July 2010 '12-'11 '12-'10 '12-'11 '12-'10

Agricultural & food products 136,734 141,400 147,413 -4,666 -10,679 -3.3% -7.2%

Grain 70,743 78,603 83,329 -7,860 -12,586 -10.0% -15.1%

Farm products excl. grain 2,787 3,029 3,122 -242 -335 -8.0% -10.7%

Grain mill products (1) 37,735 36,596 37,716 1,139 19 3.1% 0.1%

Food products 25,469 23,172 23,246 2,297 2,223 9.9% 9.6%

Chemicals and petroleum 156,705 147,011 139,984 9,694 16,721 6.6% 11.9%

Chemicals 115,028 118,702 113,178 -3,674 1,850 -3.1% 1.6%

Petroleum & petr. products (2) 41,677 28,309 26,806 13,368 14,871 47.2% 55.5%

Coal 465,445 473,390 510,735 -7,945 -45,290 -1.7% -8.9%

Forest products 42,216 41,690 40,225 526 1,991 1.3% 4.9%

Primary forest products (3) 5,749 6,051 6,437 -302 -688 -5.0% -10.7%

Lumber & wood products 12,148 11,147 9,926 1,001 2,222 9.0% 22.4%

Pulp & paper products 24,319 24,492 23,862 -173 457 -0.7% 1.9%

Metallic ores and metals 98,542 110,254 94,685 -11,712 3,857 -10.6% 4.1%

Metallic ores (4) 31,992 38,174 31,185 -6,182 807 -16.2% 2.6%

Coke 14,211 14,036 13,431 175 780 1.2% 5.8%

Primary metal products (5) 38,667 39,343 36,005 -676 2,662 -1.7% 7.4%

Iron & steel scrap 13,672 18,701 14,064 -5,029 -392 -26.9% -2.8%

Motor vehicles & parts 49,387 40,070 37,443 9,317 11,944 23.3% 31.9%Nonmetallic minerals & prod. 125,533 126,303 121,430 -770 4,103 -0.6% 3.4%

Crushed stone, gravel, sand 74,010 73,673 70,681 337 3,329 0.5% 4.7%

Nonmetallic minerals (6) 20,487 21,761 22,245 -1,274 -1,758 -5.9% -7.9%

Stone, clay & glass prod. (7) 31,036 30,869 28,504 167 2,532 0.5% 8.9%

Other 29,171 31,402 30,804 -2,231 -1,633 -7.1% -5.3%

Waste & nonferrous scrap (8) 12,089 12,858 15,200 -769 -3,111 -6.0% -20.5%

All other carloads 17,082 18,544 15,604 -1,462 1,478 -7.9% 9.5%

TOTAL ALL CARLOADS 1,103,733 1,111,520 1,122,719 -7,787 -18,986 -0.7% -1.7%

Trailers 113,100 123,389 127,638 -10,289 -14,538 -8.3% -11.4%

Containers 832,971 772,251 756,287 60,720 76,684 7.9% 10.1%

TOTAL ALL INTERMODAL 946,071 895,640 883,925 50,431 62,146 5.6% 7.0%

*Data are originations not seasonally adjusted. Includes BNSF, CSX, KCS, NS, UP, Birmingham Southern, Florida East Coast, Lake Superior &

Ishpeming, and Paducah & Louisville. Excludes CN's and CP's U.S. operations. Source: AAR Weekly Railroad Traffic

Difference % Change

U.S. RAIL TRAFFIC: JULY 2012*(4 weeks ending July 28, 2012)

(1) - flour, animal f eed, corn syrup, corn starch, soybean meal, DDGs, etc . (5) - primarily iron & steel; some aluminum, copper, etc.

(2) - crude petroleum and all products of petroleum refining (6) - phosphate rock, rock salt, crude sulphur, clay, etc.

(liquefied gases, asphalt, fuel oil, lubricating oil, jet fuel, etc.) (7) - cement, ground earths or minerals, gypsum, etc.(3) - w ood raw materials such as pulpwood and wood chips (8) - scrap paper, construction debris, ashes, etc.(4) - overwhelmingly iron ore, but some aluminum ore, copper ore, etc.






Grain 33,667 36,167 37,070 -2,500 -3,403 -6.9% -9.2%

Farm products excl. grain 7,562 11,169 11,139 -3,607 -3,577 -32.3% -32.1%

Grain mill products (1) 6,756 6,293 5,852 463 904 7.4% 15.4%Food products 8,511 8,252 8,689 259 -178 3.1% -2.0%


Chemicals 39,982 41,816 36,194 -1,834 3,788 -4.4% 10.5%


Coal 37,713 32,643 34,149 5,070 3,564 15.5% 10.4%

Forest products 30,038 30,637 29,424 -599 614 -2.0% 2.1%

Primary forest products (3) 5,884 5,817 5,751 67 133 1.2% 2.3%

Lumber & wood products 11,076 10,594 9,289 482 1,787 4.5% 19.2%

Pulp & paper products 13,078 14,226 14,384 -1,148 -1,306 -8.1% -9.1%


Metallic ores (4) 52,169 55,608 50,214 -3,439 1,955 -6.2% 3.9%

Coke 3,079 2,748 2,440 331 639 12.0% 26.2%

Primary metal products (5) 8,834 9,109 9,263 -275 -429 -3.0% -4.6%

Iron & steel scrap 3,568 3,517 2,990 51 578 1.5% 19.3%Motor vehicles & parts 17,341 13,875 15,804 3,466 1,537 25.0% 9.7%

Nonmetallic minerals & prod. 22,894 23,136 22,235 -242 659 -1.0% 3.0%

Crushed stone, gravel, sand 11,505 10,211 10,684 1,294 821 12.7% 7.7%

Nonmetallic minerals (6) 5,385 7,050 6,144 -1,665 -759 -23.6% -12.4%

Stone, clay & glass prod. (7) 6,004 5,875 5,407 129 597 2.2% 11.0%

Other 7,702 6,334 5,149 1,368 2,553 21.6% 49.6%

Waste & nonferrous scrap (8) 3,179 1,669 1,561 1,510 1,618 90.5% 103.7%

All other carloads 4,523 4,665 3,588 -142 935 -3.0% 26.1%

TOTAL ALL CARLOADS 304,178 299,043 288,342 5,135 15,836 1.7% 5.5%

Trailers 5,324 6,118 6,120 -794 -796 -13.0% -13.0%

Containers 206,440 194,022 190,798 12,418 15,642 6.4% 8.2%

TOTAL ALL INTERMODAL 211,764 200,140 196,918 11,624 14,846 5.8% 7.5%

CANADIAN RAIL TRAFFIC: JULY 2012*(4 weeks ending July 28, 2012)

Difference % Change

*CN and CP, including their U.S. operations. Data are originations not seasonally adjusted. Source: AAR Week ly Railroad Traffic

(1) - flour, animal feed, corn syrup, corn starch, soybean meal, DDGs, etc. (5) - primarily iron & steel; some aluminum, copper, etc.

(2) - crude petroleum and all products of petroleum refining (6) - phosphate rock, rock salt, crude sulphur, clay, etc.

(liquefied gases, asphalt, fuel oil, lubricating oil, jet fuel, etc.) (7) - cement, ground earths or minerals, gypsum, etc.(3) - wood raw materials such as pulpwood and wood chips (8) - scrap paper, construction debris, ashes, etc.(4) - overwhelmingly iron ore, but some aluminum ore, copper ore, etc.

90,000

100,000

110,000

120,000

130,000

140,000


Average Weekly Canadian Rail Traffic:Total Carloads + Intermodal Units

2009

2012

Data are weekly average originations for each month, are not seasonally adjusted, include CN andCP (including their U.S. operations), and reflect revisions to original reporting. Source: AAR

2007 (peak year)

20102011

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

% Change in Canadian Carloads + Intermodal UnitsFrom Same Month Prev. Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, include CN and CP (including their U.S.operations) , and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012







Grain 104,410 114,770 120,399 -10,360 -15,989 -9.0% -13.3%

Farm products excl. grain 10,349 14,198 14,261 -3,849 -3,912 -27.1% -27.4%

Grain mill products (1) 44,491 42,889 43,568 1,602 923 3.7% 2.1%

Food products 33,980 31,424 31,935 2,556 2,045 8.1% 6.4%


Chemicals 155,010 160,518 149,372 -5,508 5,638 -3.4% 3.8%


Coal 503,158 506,033 544,884 -2,875 -41,726 -0.6% -7.7%

Forest products 72,254 72,327 69,649 -73 2,605 -0.1% 3.7%

Primary forest products (3) 11,633 11,868 12,188 -235 -555 -2.0% -4.6%

Lumber & wood products 23,224 21,741 19,215 1,483 4,009 6.8% 20.9%

Pulp & paper products 37,397 38,718 38,246 -1,321 -849 -3.4% -2.2%


Metallic ores (4) 84,161 93,782 81,399 -9,621 2,762 -10.3% 3.4%

Coke 17,290 16,784 15,871 506 1,419 3.0% 8.9%

Primary metal products (5) 47,501 48,452 45,268 -951 2,233 -2.0% 4.9%

Iron & steel scrap 17,240 22,218 17,054 -4,978 186 -22.4% 1.1%

Motor vehicles & parts 66,728 53,945 53,247 12,783 13,481 23.7% 25.3%

Nonmetallic minerals & prod. 148,427 149,439 143,665 -1,012 4,762 -0.7% 3.3%

Crushed stone, gravel, sand 85,515 83,884 81,365 1,631 4,150 1.9% 5.1%

Nonmetallic minerals (6) 25,872 28,811 28,389 -2,939 -2,517 -10.2% -8.9%

Stone, clay & glass prod. (7) 37,040 36,744 33,911 296 3,129 0.8% 9.2%

Other 36,873 37,736 35,953 -863 920 -2.3% 2.6%

Waste & nonferrous scrap (8) 15,268 14,527 16,761 741 -1,493 5.1% -8.9%

All other carloads 21,605 23,209 19,192 -1,604 2,413 -6.9% 12.6%

TOTAL ALL CARLOADS 1,407,911 1,410,563 1,411,061 -2,652 -3,150 -0.2% -0.2%

Trailers 118,424 129,507 133,758 -11,083 -15,334 -8.6% -11.5%

Containers 1,039,411 966,273 947,085 73,138 92,326 7.6% 9.7%

TOTAL ALL INTERMODAL 1,157,835 1,095,780 1,080,843 62,055 76,992 5.7% 7.1%

COMBINED U.S. AND CANADIAN RAIL TRAFFIC: JULY 2012*(4 weeks ending July 28, 2012)

Difference % Change

*Data are originations and are not seasonally adjusted. Source: AAR Weekly Railroad Traffic

(1) - flour, animal feed, corn syrup, corn starch, soybean meal, DDGs, etc. (5) - primarily iron & steel; some aluminum, copper, etc.

(2) - crude petroleum and all products of petroleum refining (6) - phosphate rock, rock salt, crude sulphur, c lay, etc.

(liquefied gases, asphalt, fuel oil, lubricating oil, jet fuel, etc.) (7) - cement, ground earths or minerals, gypsum, etc.(3) - wood raw materials such as pulpwood and wood chips (8) - scrap paper, construction debris, ashes, etc.(4) - overwhelmingly iron ore, but some aluminum ore, copper ore, etc.

500,000

525,000

550,000

575,000

600,000

625,000

650,000

675,000

700,000

725,000

750,000


Average Weekly U.S. + Canadian Rail Traffic:Total Carloads + Intermodal Units

2006 (peak year)

2009

2012

Data are weekly average originations for each month, are not seasonally adjusted, andreflec t revisions to original reporting. Source: AAR Weekly Railroad Traffic

2010

2011

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

% Change in Combined U.S. + Canadian Rail Carloads+ Intermodal Units From Same Month Previous Year:

Jan. 2006 - July 2012

2006 2007 2008 2009 2010 2011Data are based on weekly average originations for each month, are not seasonally adjusted, andreflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2012





COAL

U.S. coal carloads averaged 116,361 per week in July 2012, the highest weekly average in fivemonths. No doubt this was partly due to record-high temperatures in much of the nation in July that led tohigher electricity generation to power everyone’s air conditioners. The chart on the bottom left showsthat, in May (the most recent data available at the time of this writing), coal was slightly ahead of naturalgas in terms of electricity generation. The chart on the bottom right shows that cooling degree days inJuly were far, far above normal in many states that rely relatively heavily on coal-fired electricity.

12%

16%

20%

24%

28%

32%

36%

40%

44%

48%

52%

Coal vs. Natural Gas as % of U.S. Electricity GenerationJan. 2007 - May 2012

Source: EIA

2007 2008 2009 2010 2011 2012

Coal

Natural gas

100,000

110,000

120,000

130,000

140,000

150,000

160,000


Average Weekly U.S. Rail Carloads of Coal

2009

2008 (peak year)

Data are weekly average originations f or each month, are not seasonally adjusted, exclude U.S.operations of CN and CP, and reflect revisions to original reporting. Source: AAR

2012

2010

2011

-20%

-15%

-10%

-5%

0%

5%

10%

15%

% Change in U.S. Rail Carloads of Coal From SameMonth Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, exc lude U.S. operations of CN andCP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012


4,000

5,000

6,000

7,000

8,000

9,000

10,000


Avg. Weekly Canadian Rail Carloads of Coal

2009 2008

Data are weekly average originations for each month, are not seasonally adjusted, include CN andCP (including their U.S. operations), and reflect revisions to original reporting. Source: AAR

2012

2010

2011

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

% Change in Canadian Carloads of Coal From SameMonth Previous Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012


CO

ILIN

IA

KY

MIMN

MO

MT

ND

OH

PA

UT

WV

WI

WY

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

Source: National Weather Service

% Change in Cooling Degree Days in July 2012Compared With Normal*




U.S. railroads originated 115,028 carloads of chemicals in July 2012, down 3.1% (3,674 carloads)from July 2011. For the year through July, U.S. chemical carloads are down 1.5% (13,245 carloads).Carloads of chemicals on Canadian railroads have fallen too, including a 4.4% decline (1,834 carloads) inJuly 2012. The charts on the bottom show U.S. chemical carloads compared with U.S. chemical outputand U.S. chemical capacity utilization. In both cases, the correlation is positive, but only moderately so,as rail carloads have outpaced output and capacity utilization.

CHEMICALS

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,000

32,000

33,000


Avg. Weekly U.S. Rail Carloads of Chemicals

2009

2012


2007 (peak year)

2010

2011

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

% Change in U.S. Rail Carloads of Chemicals FromSame Month Previous Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000


Avg. Weekly Canadian Rail Carloads of Chemicals

2009

2008

Data are weekly average originations for each month, are not seasonally adjusted, inc lude CN andCP (including their U.S. operations) , and reflect revisions to original reporting. Source: AAR

2010

2011

2012

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

% Change in Canadian Carloads of Chemicals FromSame Month Previous Year: Jan. 2009 - July 2012

2009 2010

Data are based on originations, are not seasonally adjusted, include CN and CP (including theirU.S. operations) , and reflect revisions to original reporting. Data prior to 2009 are notcomparable. Source: AAR Weekly Railroad Traffic

2011 2012

July 2012 was down 4.4% from July 2011 and up 10.5% over July 2010.

19,000

21,000

23,000

25,000

27,000

29,000

31,000

33,000

75

80

85

90

95

100

105

110

U.S. Chemical Productionvs. U.S. Rail Carloads of Chemicals

2007 2010 2012201120092008

Data are seasonally adjusted. Carloads are weekly averages. Source: Federal Reserve, AAR

Chemcialproduction(left scale,

Jan. 2007=100)correlation = 62%

Carloads (right scale)

18,000

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

58%

61%

64%

67%

70%

73%

76%

79%

82%

*Capacity utilization is through June 2012 and is adjusted to take into account changes inthe chemical industry's "capacity base" since January 2007. Data are seasonally adjusted.Carloads are weekly averages per month. Source: Federal Reserve, AAR

Capacity Utilization vs. Rail Carloads: ChemicalsJan. 2007 - June 2012*

correlation = 62%

2007 2008 2009 2010 2011 2012

Capacityutilization forchemicals*(left scale)

Carloads (right scale)




GRAIN

Grain’s woes continue. U.S. railroads originated 70,743 carloads of grain in July 2012, down10.0% (7,860 carloads) from July 2011 and the 13

thstraight year-over-year monthly decline. It hasn’t

been much better for Canadian railroads: Canadian grain carloads, which include their substantial U.S.grain operations, were down 6.9% (2,500 carloads) in July. The severe drought that decimated graincrops in many areas of the United States over the past month won’t help spur future grain carloadings.

16,000

18,000

20,000

22,000

24,000

26,000

28,000


Average Weekly U.S. Rail Carloads of Grain

2009

2008


2012

2010

2011

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

% Change in U.S. Rail Carloads of Grain From SameMonth Previous Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012

July 2012 was down 10.0% from July 2011and down 15.1% from July 2010.

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,000


Average Weekly Canadian Rail Carloads of Grain

2009

2008

Data are weekly average originations for each month, are not seasonally adjusted, inc lude CN andCP (including their U.S. operations) , and reflect revisions to original reporting. Source: AAR

2012

2010

2011

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

% Change in Canadian Carloads of Grain From SameMonth Previous Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012


24,000

26,000

28,000

30,000

32,000

34,000

36,000

38,000


Combined U.S. + CanadianAverage Weekly Rail Carloads of Grain

2009

2012

Data are weekly average originations for each month, are not seasonally adjusted, and reflectrevisions to original reporting. Source: AAR Weekly Railroad Traffic

2008

2010

2011

-30%

-25%

-20%

-15%

-10%

-5%

0%5%

10%

15%

20%

25%

% Change in U.S. + Canadian Rail Carloads of GrainFrom Same Month Prev. Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, inc lude CN and CP (including theirU.S. operations), and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012





CARLOAD AND INTERMODAL TOTALS

ALL COMMODITIES EXCLUDING COAL

ALL COMMODITIES EXCLUDING COAL AND GRAIN

100,000

125,000

150,000

175,000

200,000

225,000

250,000

275,000

U.S. Rail Intermodal Traffic: Jan. 2006 - July 2012

Data are weekly average originations for each month, are not seasonally adjusted, and excludeU.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012150,000

175,000

200,000

225,000

250,000

275,000

300,000

325,000

350,000

375,000

U.S. Rail Carload Traffic: Jan. 2006 - July 2012

Data are weekly average originations for each month, are not seasonally adjusted, and excludeU.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000

200,000

210,000


Average Weekly U.S. Rail Carloads:All Commodities Excluding Coal

2006 (peak year)

2009

2012


2010

2011

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

% Change in U.S. Rail Carloads Excluding Coal FromSame Month Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, exclude U.S. operations of CN andCP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012


100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000


Average Weekly U.S. Rail Carloads:All Commodities Excluding Coal and Grain

2006 (peak year)

2009

2012


2010

2011

-35%

-30%

-25%

-20%

-15%

-10%-5%

0%

5%

10%

15%

20%

25%

30%

% Change in U.S. Rail Carloads Excl. Coal & GrainFrom Same Month Prev. Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012





INDUSTRIAL PRODUCTS

PRIMARY METAL PRODUCTS (MAINLY IRON AND STEEL)

IRON AND STEEL SCRAP

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000


Avg. Weekly U.S. Rail Carloads: Industrial Products*

2006 (peak year)

2009

2012

*Data include chemicals; paper; metal products; autos; crushed stone and gravel; metallic ores;and stone and glass products. Data are weekly average originations for each month and excludethe U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic

2010

2011

4,000

6,000

8,000

10,000

12,000

14,000


Average Weekly U.S. Rail Carloadsof Steel and Other Primary Metal Products

2012

2009

2008

Data are weekly average originations for each month, are not seasonally adjusted, exc lude U.S.operations of CN and CP, and reflect revisions to original reporting. Source: AAR

2010

2011

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

% Change in U.S. Rail Carloads of Steel and OtherPrimary Metal Products From Same Month

Previous Year: Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012


2,000

3,000

4,000

5,000

6,000

7,000


Average Weekly U.S. Rail Carloadsof Iron and Steel Scrap

2009

2008


2010

2011

2012

-80%

-60%

-40%

-20%

0%

20%40%

60%

80%

100%

120%

% Change in U.S. Rail Carloads of Iron andSteel Scrap From Same Month Previous Year:

Jan. 2009 - July 2012

2009 2010

Data are based on originations, are not seasonally adjusted and exclude U.S. operations of CNand CP. Data prior to 2009 are not available. Source: AAR Weekly Railroad Traffic

2011 2012


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

% Change in U.S. Rail Carloads of Industrial ProductsFrom Same Month Prev. Year: Jan. 2006 - July 2012*

2006 2007 2008 2009 2010 2012*Data include chemicals; paper; metal products; autos; crushed stone and gravel; metallic ores; andstone and glass products. Data are based on weekly average originations for each month andexclude the U.S. operations of CN and CP. Source: AARWeekly Railroad Traffic

2011





CRUSHED STONE, SAND, AND GRAVEL

PETROLEUM & PETROLEUM PRODUCTS(CRUDE PETROLEUM, LPGs, ASPHALT, FUEL OIL, LUBRICATING OILS, ETC.)

MOTOR VEHICLES AND PARTS

8,000

10,000

12,000

14,000

16,000

18,000

20,00022,000

24,000

26,000

28,000


Average Weekly U.S. Rail Carloadsof Crushed Stone, Sand, and Gravel

2006 (peak year)

2009

2012


2010

2011

-35%-30%-25%-20%-15%-10%-5%0%5%

10%15%20%25%30%35%

% Change in U.S. Rail Carloads of Crushed Stone,Sand, and Gravel From Same Month Previous Year:

Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012


8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000


Combined U.S. + Canadian Average Weekly RailCarloads of Petroleum and Petroleum Products

2008

2009

2012


2010

2011

-20%

-10%

0%

10%

20%

30%

40%

50%

% Change in Combined U.S. + Canadian Rail Carloadsof Petroleum & Petroleum Products From Same Month



2009 2010 2011 2012


7,000

10,000

13,000

16,000

19,000

22,000

25,000

28,000


Combined U.S. + CanadianAverage Weekly Rail Carloads of Motor Vehicles*

2008

2009

2012

*Includes parts. Data are weekly average originations for each month, are not seasonallyadjusted, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2010

2011

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

% Change in Combined U.S. + Canadian Rail Carloadsof Motor Vehicles* From Same Month Previous Year:

Jan. 2006 - July 2012


2006 2007 2008 2009 2010 2011 2012





METALLIC ORES (OVERWHELMINGLY IRON ORE)

LUMBER AND WOOD PRODUCTS + PRIMARY FOREST PRODUCTS

PULP AND PAPER PRODUCTS

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000


Combined U.S. + CanadianAvg. Weekly Rail Carloads of Metallic Ores

2009

2008


2012

2010

2011

-80%-60%-40%-20%

0%20%40%60%80%

100%120%140%

160%180%200%220%

% Change in Combined U.S. + Canadian Rail Carloadsof Metallic Ores From Same Month Previous Year:

Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, and reflect revisions to originalreporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012


5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000


Combined U.S. + Canadian Average Weekly RailCarloads of Lumber and Primary Forest Products

2009

2008

Data are weekly average originations for each month, are not seasonally adjusted, andreflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2012

2010

2011

-40%

-30%

-20%

-10%

0%

10%

20%

30%

% Change in Combined U.S. + Canadian Rail Carloadsof Lumber and Primary Forest Products From Same

Month Previous Year: Jan. 2006 - July 2012

Data are based on originations, are not seasonally adjusted, and reflect revisions tooriginal reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012

July 2012 was up 3.7% over July 2011and up 43.0% over July 2010.

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500


Combined U.S. + Canadian Average WeeklyRail Carloads of Pulp and Paper Products

2009

2012

Data are weekly average originations for each month, are not seasonally adjusted, andreflect revisions to original reporting. Source: AAR Weekly Railroad Traffic

2008

20102011

-30%

-25%

-20%

-15%

-10%-5%

0%

5%

10%

15%

% Change in Combined U.S. + Canadian Rail Carloadsof Pulp and Paper Products From Same Month


Data are based on originations, are not seasonally adjusted, and reflect revisions tooriginal reporting. Source: AAR Weekly Railroad Traffic

2006 2007 2008 2009 2010 2011 2012




`Rail Time Indicators – August 3, 2012

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GROSS DOMESTIC PRODUCT (GDP)


GDP (the output of goods and services produced by labor and property in a country) measuresthe size of an economy and how fast it’s growing. Assuming it’s measured accurately, it’sprobably the single most conclusive piece of information on the health of an economy.

The GDP figure that gets all the press is the annualized percentage change in inflation-adjustedGDP from one quarter to the next. It’s calculated by the Bureau of Economic Analysis (BEA).The BEA revises GDP several timesas more and better component databecome available. Still, because ofthe tremendous size and complexity ofthe U.S. economy, it can be verydifficult to know where we are one theexpansion/recession continuum.

GDP and freight rail traffic havehistorically been closely correlated,although rail freight traffic tends to bemore volatile than the economy as awhole. The correlation isn’t perfect,but it is strong and positive.

What are the latest numbers?

Anyone who’s followed the economyover the past few years knows it’sbeen hard to get a good read on where it is and where it’s going. Two recent newspaperheadlines illustrate this point. On July13, an article in The New York Timeswas headlined, “In Latest Data,Economists See Signs of Pickup.” OnJuly 20, The Washington Examinerhad a story headlined, “Data Add to

Signs of Slowing Recovery.”

On July 27, the BEA put itself firmly inthe “economy is slowing” camp when itannounced that its first preliminaryestimate was that U.S. GDP grew just1.5% in the second quarter of 2012,down from 2.0% in Q1 2012 and4.1% in Q4 2011 (see chart at right).

The BEA’s quarterly GDP estimatesare revised several times in ensuingmonths as better data becomeavailable, so the 1.5% estimate for Q2 2012 will likely change. In addition, once a year — most

recently on July 27 — the BEA releases revised historical GDP data going back several years.The table on the top of the next page shows those revisions, which in some cases were substan-tial. For example, the revised numbers show that economic growth in the first half of 2010 wasmuch slower than previously thought, while growth in the fourth quarter of 2011 was much faster.

A number of factors contributed to the slower growth in the second quarter of 2012:

Personal consumption expenditures, which account for more than 70% of GDP, rosean annualized 1.5% in Q2 2012, down from 2.4% in Q1 2012 and 2.0% in Q4 2011 (seetop left chart on the next page).

-24%

-20%-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%% Change in U.S. GDP vs. Rail Traffic

GDP in Q2 2012 is preliminary. Perc entages are year-over-year. Traffic = carloadsexcluding coal and grain + intermodal containers and trailers. Source: BEA, AAR

'01 '02 '06'04'03 '10 '11'05 '07 '08 '09 '12

bars = GDPline = rail traffic

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Quarterly Real U.S. GDP Growth: Q1 2006 – Q2 2012(annualized % change from previous quarter)

Q2 2012 is first preliminary estimate. Source: Bureau of Economic Analysis

2011 20122006 2007 2008 2009 2010

Q2 2012: 1.5% (preliminary)




Nonresidential fixed investment — equipment, software,structures, etc. with a useful life of more than one year —rose 5.4% in the second quarter, which sounds pretty goodexcept when compared to the 12.6% average growth theprevious four quarters (top right chart below).

Government consumption expenditures have fallen foreight straight quarters, driven mainly by cutbacks in state andlocal government spending. The $9 billion reduction ingovernment consumption expenditures in Q2 2012 from Q12011 was the smallest reduction in a year.

At its peak in Q4 2005, residential fixed investment (homepurchases) accounted for 6.2% of GDP. In Q2 2012, it was2.7%. This component of GDP fell — usually sharply — in 18of the 21 quarters from Q1 2006 through Q1 2011. In the fivequarters since then, it has contributed to GDP growth butfrom a much smaller base. It will probably be years before itreturns to its pre-recession level (see chart bottom right).

Exports, which add to GDP, rose at an annualized rate of5.3% in Q2 2012 over Q1 2012, its highest rate of growth in

three quarters. However, imports — which count againstGDP — grew 6.0% in Q2 2012, slightly faster than exports, sothe net effect on GDP was negative compared to the previous quarter.

Original Revised

Q1 09 -6.7% -5.2%

Q2 09 -0.7% -0.3%

Q3 09 1.7% 1.4%

Q4 09 3.8% 4.0%

Q1 10 3.9% 2.3%

Q2 10 3.8% 2.2%

Q3 10 2.5% 2.6%

Q4 10 2.3% 2.4%

Q1 11 0.4% 0.1%

Q2 11 1.3% 2.5%

Q3 11 1.8% 1.3%

Q4 11 3.0% 4.1%

Q1 12 1.9% 2.0%

2008 -0.3% -0.3%

2009 -3.5% -3.1%

2010 3.0% 2.4%

2011 1.7% 1.8%

U.S. Real GDP Growth:

July 27, 2012 Revisions

$8,500

$8,600

$8,700

$8,800

$8,900$9,000

$9,100

$9,200

$9,300

$9,400

$9,500

$9,600

$9,700

Total Personal Consumption*(billions of inflation-adjusted 2005 $, annualized)

Source: Bureau of Economic Analysis (NIPA Table 1.1.6)

2010 20112005 2006 2007 2008 2009 2012

Up 1.5% in Q2 2012 over Q1 2012, down from a 2.4% increase in Q1 2012 over Q4 2011.

$2,150

$2,200

$2,250

$2,300

$2,350

$2,400

$2,450$2,500

$2,550

$2,600

$2,650

Total Government Consumption*(billions of inflation-adjusted 2005 $, annualized)

*Value of goods and services provided to the public such as defense and education, plusequipment, software, and structures to provide these services. Does not include governmentspending for social service programs or interest. Source: BEA (NIPA Table 1.1.6)

2010 20112005 2006 2007 2008 2009 2012

Government consumption has fallen for eight straight quarters,driven mainly by lower state and

local government spending.

$1,000

$1,100

$1,200$1,300

$1,400

$1,500

$1,600

$1,700

$1,800

Nonresidential Fixed Investment*(billions of inflation-adjusted 2005 $, annualized)

*Equipment, software, structures, etc. with a useful life of more than one year.Source: Bureau of Economic Analysis (NIPA Table 1.1.6)

2010 20112005 2006 2007 2008 2009 2012

Up 5.4% in Q2 '12 over Q1 '12, the lowest rate of increase in five quarters.

$200

$300

$400

$500

$600

$700

$800

$900

Residential Fixed Investment*(billions of inflation-adjusted 2005 $, annualized)

*Purchases of homes by households. Source: BEA (NIPA Table 1.1.6)

2010 20122005 2006 2007 2008 2009




We last showed a variation of the table atright five months ago. It shows estimatedGDP growth in 2012 for the world’s top14 economies as forecast by theEconomist Intelligence Unit (EIU).

1The

table shows the EIU’s March 2012forecasts for 2012 GDP growth as well as

its most recent July 2012 forecasts. Formost countries, the July forecast is moreoptimistic than the one from March, andfor most countries, GDP is expected togrow faster in 2013 (see the last column).

A lot can happen to throw off forecasts,of course. On July 16, the InternationalMonetary Fund released its latest updateto its World Economic Outlook. Thelatest update forecasts 3.5% growth inglobal GDP in 2012 and 3.9% growth in2013. The IMF warned that its forecastmakes three major assumptions, none of

which are sure things:

There will be enough policy action for financial conditions in the euro area, includingGreece and Spain, to ease gradually through 2013;

U.S. fiscal policy does not tighten sharply in 2013; and

Steps by some major emerging markets to stimulate growth gain traction.

According to the IMF, the most immediate risks to the global recovery are that policymakers fail tosolve the euro area crisis

2and the United States plunges off the “fiscal cliff,” which the IMF says

would lead to “a severe decline in U.S. growth, with significant spillovers to the rest of the world.”

The IMF’s forecasts for GDP growth for individual countries are generally very similar to the EIU’sforecasts. For a summary of the IMF report, see here.

The bottom line is that the U.S. economy appears to still be in a slow-but-fragile growth mode.Whether policymakers at the Federal Reserve or elsewhere in Washington can do anything tomake the economy grow faster is an open question.

Where to go for more information:

The most recent BEA news release on GDP, including links to detailed data tables, is here. BEAwill release its second preliminary estimate of Q2 2012 GDP on August 29.

1The Economist Intelligence Unit is the research and forecasting unit of The Economist Group, the publisher of The

Economist magazine.

2Policymakers have been trying to solve the euro-zone crisis for a couple of years now. The general pattern is that

an agreement is announced and everyone is happy — politicians say optimistic things, stocks go up, etc. Usually theoptimism only lasts a short while, until it becomes clear that the agreement everyone was touting a few weeks ormonths before doesn’t actually solve anything. Then, policymakers get together again, eventually announce a newagreement, and the cycle repeats. Cynics might say there’s a parallel between what’s going on in Europe and the oldPeanuts cartoons in which Lucy offers to hold a football for Charlie Brown to kick. Every time, Lucy pulls the ballaway at the last second, and Charlie Brown goes flying. Charlie Brown knows Lucy can’t be trusted, but each timeLucy says that this time she really will hold the football, and each time Charlie Brown suspends his disbelief, only togo flying as Lucy pulls the ball away again. (Alas, Charlie Brown and the rest of the Peanuts gang are from adifferent era and thus practically unknown to many Americans today. Clickhere for a short Youtube clip from a 1966Peanuts cartoon showing the Lucy - Charlie Brown football scene.)

2013

2010 GDP March '12 July '12 July '12

($ trillions) Forecast Forecast Forecast

United States $14.45 2.0% 2.1% 2.1%

China $5.74 8.2% 8.2% 8.5%

Japan $5.46 1.6% 2.3% 1.5%

Germany $3.28 0.1% 0.8% 1.2%

France $2.56 -0.2% 0.2% 0.6%

United Kingdom $2.25 0.2% 0.1% 1.5%

Brazil $2.09 3.3% 2.0% 4.2%

Italy $2.05 -1.2% -2.0% -0.4%

India $1.72 6.3% 6.6% 7.4%

Canada $1.58 2.0% 2.1% 2.3%

Russia $1.48 3.2% 3.8% 3.9%

Spain $1.41 -1.2% -1.6% -1.0%

Australia $1.27 3.0% 3.3% 3.2%

Mexico $1.03 3.3% 3.7% 3.8%

Source: The Economist, United Nations Statistics Division

2012

Estimated GDP Growth

http://www.imf.org/external/pubs/ft/survey/so/2012/NEW071612A.htm

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

http://www.youtube.com/watch?v=GsSXMT0NrB4



http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

http://www.imf.org/external/pubs/ft/survey/so/2012/NEW071612A.htm




PURCHASING MANAGERS INDEX (PMI) and NON-MANUFACTURING INDEX (NMI)


The PMI is released by the Institute for Supply Management (ISM) and combines data on neworders, inventory, production, supplier deliveries, and employment. It is based on a survey ofseveral hundred supply managers at manufacturers throughout the country and is considered anindicator both of actual “on-the-ground” conditions as well as near- to medium-term sentiment.The NMI is like the PMI, except that it tracks services.

There’s still some debate because of concerns about what currency to use and other factors, butthe consensus seems to be that China recently passed the United States to become the world’stop manufacturing country. Even if that’s true, manufacturing in the United States is still muchlarger than most people seem to realize: the value of U.S. manufacturing is larger than the entireGDP of all but eight countries.3 Much of what railroads haul consists of raw materials formanufacturing or finished manufactured goods. Services account for around two-thirds of U.S.GDP and around 80% of private-sector employment.

According to the ISM, a PMI > 50 indicates that overall manufacturing is generally expanding; aPMI < 50 indicates manufacturing is generally contracting. Likewise, an NMI < 50 indicates theservices sector overall is contracting; an NMI > 50 indicates the service sector is expanding.

What are the latest numbers? The PMI rose slightly from 49.7 in June 2012 to 49.8 in July, indicating contraction in

manufacturing for the second straight month after 34 consecutive months of expansion (asindicated by a PMI > 50 over that period). Of the 18 manufacturing industries tracked by the ISM,seven grew in July, the same number as in June and down from 13 in May and 16 in April.

The news was only marginally better for the new orders component of the PMI, which rose to48.0 in July from 47.8 in June.

What the ISM said about July’s PMI: "A growing number of comments from the panel this monthreflect a slowdown in their businesses and general concern over increasing economicuncertainty."

3Next time you’re at a party, ask people how much of U.S. consumption they think is “made in China.” (They’ll

probably look at you funny and then start slowly backing away, but ignore that.) A study by researchers at theFederal Reserve Bank of San Francisco last year (see here) found that, “Goods and services from China accountedfor only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs ofChinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carryingthe "made in China" label.” If the imported content of goods made in the U.S. is considered, Chinese imports makeup 1.9% of U.S. consumer spending, according to the study. Most of the people we asked estimated around 10%.

20

25

30

35

40

45

50

55

60

65

70

75

Data are seasonally adjusted. Source: Institute for Supply Management

Purchasing Managers Index (PMI):Jan. 2007 - July 2012


2007 2008 2009 2010 2011 2012

New orders

Overall PMI(> 50 = m anuf. is expanding)

(< 50 = manuf. is contracting)

June '12 July '12

PMI 49.7 49.8

New Orders 47.8 48.0

20

25

30

35

40

45

50

55

60

65

70


Non-Manufacturing Index (NMI):Jan. 2008 - July 2012

2008 2009 2010

Overall NMI(> 50 = non -manuf. is expanding)(< 50 = non-manuf. is contracting)

2011

New orders

2012

June '12 July '12

NMI 52.1 52.6

New Orders 53.3 54.3

http://www.frbsf.org/publications/economics/letter/2011/el2011-25.html

http://www.frbsf.org/publications/economics/letter/2011/el2011-25.html




For its part, the NMI — which focuses on services in the same way that the PMI focuses onmanufacturing — rose slightly in July 2012 to 52.6 from 52.1 in June 2012 (see chart on thebottom right of the previous page). Eleven non-manufacturing industries (out of 18 industriestracked by the ISM) reported growth in July, down from 12 in June and 13 in May.

The new orders component of the NMI also rose slightly, to 54.3 in July from 53.3 in June.Ten industries reported growth in new orders in July, compared with 11 in June and 12 in May.

Where to go for more information: The ISM’s press release on the July PMI is here. August’s PMI will be released on September 4.

The ISM’s press release on the July NMI is here. August’s NMI will be released on September 6.

MANUFACTURING INVENTORIES AND SALES


Firms don’t want to hold too much inventory because it costs money to store and it can becomeobsolete or spoil. Plus, inventory earns no return on investment. But firms don’t want too littleinventory either, or they could lose sales. Like Goldilocks, they want inventory that’s “just right.”

When sales fall, inventories must rise if production is kept at the same pace. Eventually, when

inventories are too high, “destocking” occurs via production cuts. This leads to job losses, fewerraw material purchases, and other negative economy-wide effects. When sales rise, eitherinventories must fall, production must increase, or both. Eventually, inventories become too lowand “restocking” occurs via production increases. This means more employment, more rawmaterial purchases, and other positive economy-wide effects.

Manufacturing inventory and sales data come from the Census Bureau and are based on surveysfrom manufacturing establishments with $500 million or more in annual shipments (about 4,300reporting units), broken down into 89 industry categories.

What are the latest numbers? Manufacturing sales fell 1.1% ($5.3 billion) in June 2012 from May 2012 to $469.9 billion,

their biggest month-to-month decline since March 2009. Manufacturing sales in June 2012were 2.9% higher than they were in June 2011, the lowest such increase since December 2009

(see chart below right).

$300

$325

$350

$375

$400

$425

$450

$475

$500

$525

$550

$575

$600

$625

Data are seasonally adjusted but not adjusted for inflation. Source: Census Bureau

Manufact. Sales & Inventories: Jan. 2007 - June 2012($ billions)

Manufacturinginventories

2007 2008 2009 2010 2011 2012

recession

Manufacturing sales

-28%

-24%

-20%-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

Data are seasonally-adjusted but not adjusted for inflation. Source: Census Bureau

% Change in Manufacturing Sales From Same MonthPrevious Year: Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

June 2012: +2.9%

http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942

http://www.ism.ws/about/MediaRoom/newsreleasedetail.cfm?ItemNumber=22876

http://www.ism.ws/about/MediaRoom/newsreleasedetail.cfm?ItemNumber=22876

http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942




Manufacturing inventories grew 0.1% in June to $605.4 billion (see the line in chart on thebottom left of the previous page). The resulting inventory-sales ratio for manufacturing was1.29 in June 2012, its highest point since June 2010.

As we noted back in June, at the same time that the Census Bureau reports on manufacturingsales and inventories, it also reports on new orders for manufacturing. The chart above leftshows that new orders for all manufacturing fell 0.5% in June, the third month in the past four thatthey have fallen. Most economists didn’t expect that. The chart above right shows that neworders excluding volatile transportation orders (aircraft orders, included in transportation, areespecially volatile) fell 1.8% in June, their biggest decline since March 2009.

The figures in this section will be revised next month as new and better input data becomeavailable, so they could change. For now, though, while they don’t necessarily portend doom andgloom ahead, neither do they give reason for much optimism. In other words, we have more ofthe same difficulty in determining where the economy is and where it’s going.

Where to go for more information: The Census Bureau’s report on manufacturing sales and inventories in June is here. July 2012

data will be released on August 31.

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180$200

Data are seasonally adjusted. Source: Census Bureau

Gap Between Manufacturing Inventories andManufacturing Sales: Jan. 2007 - June 2012

($ billions)

2007 2008 2009 2010 2011 2012

-9%-8%

-7%-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%


% Change in Manufacturing New Orders FromPrevious Month: Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

June 2012: -0.5%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%


% Change in Manufacturing New Orders Excl. Transp.From Previous Month: Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

June 2012: -1.8%

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

2007 2008 2009 2010 2011

Data are seasonally adjusted. Source: Census Bureau

Inventory-Sales Ratio for Manufacturing:Jan. 2007 - June 2012

2012

June 2012 = 1.29

http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf




INDUSTRIAL PRODUCTION


Industrial production figures, which come from the Federal Reserve, are based on the monthlyraw volume of goods produced by U.S. industrial firms such as factories, mines, and electricutilities. Data are obtained from a variety of government and industry sources. Manufacturingaccounts for about 75% of industrial production, utilities and mining for the remainder.

What are the latest numbers? U.S. industrial production rose 0.4% in June 2012 over May 2012, continuing an up-one-

month-down-the-next pattern that’s held for the past five months (see top right chart below). InQ2 2012, it rose 2.2%, down from 5.8% in Q1 2012 (see the top left chart on next page).

The all-time peak for U.S. industrial production was December 2007. As of June 2012, 54months later, industrial production was still only at 96.7% of the peak (see top left chart below).Not since the post-World War II period, when there was a huge industrial drawdown, has morethan 54 months passed between one peak in U.S. industrial production and another. At the post-June 2009 rate of increase, it will take approximately another year and a half for industrialproduction to return to where it was in December 2007.

The manufacturing component of industrial production rose 0.7% in June 2012 over May2012, also continuing its recent up-down pattern (see bottom right chart below). It’s now at93.9% of its pre-recession peak (see bottom left chart below). In Q2 2012, manufacturing outputrose 1.4%, down sharply from the 9.8% gain in Q1 2012 (see top right chart on next page).

75

80

85

90

95

100

105

110

Data are seasonally adjusted. Source: Federal Reserve

U.S. Industrial Production: Jan. 2007 - June 2012(Jan. 2007 = 100)

2007 2008 2009 2010 2011 2012

Dec. 2007 = all-time peak

June 2012 = 96.7% of peak

June 2009 =82.8% of peak

-5%

-4%

-3%

-2%

-1%

0%

1%

2%


Overall U.S. Industrial Production:% Change From Previous Month

Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

hurricanes

June 2012: +0.4%

-4%

-3%

-2%

-1%

0%

1%

2%


Manufacturing % Change From Previous Month:Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

June 2012: +0.7%

75

80

85

90

95

100

105

110


U.S. Manufacturing Output: Jan. 2007 - June 2012(Jan. 2007 = 100)

2007 2008 2009 2010 2011 2012

Dec. 2007 = all-time peak

June 2012 = 93.9% of peak

June 2009 =79.3% of peak




The charts above show changes in output for several key industrial sectors. Note the big drop iniron and steel output in June. After big increases in most of 2011, output of railroad rolling stockhas fluctuated within a narrow band. The charts below are variants of charts we show eachmonth. There is a very strong positive correlation between rail traffic and industrial production,both overall and for many industrial sectors.

50

60

70

80

90

100

110

120

130

U.S. Industrial Production: Select SectorsJan. 2007 - June 2012

(Jan. 2007 = 100)

2009 20112007 2008 2010


2012

Wood

Paper

Chemicals

Iron & steel

30

40

50

60

70

80

90

100

110

120

130

U.S. Industrial Production: Select SectorsJan. 2007 - June 2012

(Jan. 2007 = 100)

2009 2011


2007 2008 2010 2012

Cement

RR rollingstock

Gas & elec. utilities

Motor vehicles & parts

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Data are seasonally adjusted. Q2 2012 is preliminary. Source: Federal Reserve

Manufacturing Output:% Change From Previous Quarter

Q1 2007 - Q2 2012

2007 2008 2009 2010 2011 2012

Q2 2012: +1.4%

-20%

-15%

-10%

-5%

0%

5%

10%

Data are seasonally adjusted. Q2 2012 is preliminary. Source: Federal Reserve

Overall U.S. Industrial Production:% Change From Previous Quarter

Q1 2007 - Q2 2012

2007 2008 2009 2010 2011 2012

Q2 2012: +2.2%

420,000

440,000

460,000

480,000

500,000

520,000

540,000

560,000

580,000

70

75

80

85

90

95

100

105

110

*Carloads + intermodal units Data are seasonally adjusted. Source: Federal Reserve, AAR

Total U.S. Industrial Production vs.Total U.S. Rail Traffic*

2007 2010 2012201120092008

correlation = 95%

recession

Industrialproduction(left scale,

Jan. 2007=100)

Rail traffic (right scale)*

65,000

80,000

95,000

110,000

125,000

140,000

155,000

170,000

185,000

70

75

80

85

90

95

100

105

110

*Computers, communications eq., and semiconductors . Data are seasonally adjusted.Source: Federal Reserve, AAR

Manufacturing Output Excluding Hi-Technology* vs.U.S. Rail Carloads Excluding Coal & Grain

2007 2010 2012201120092008

correlation = 97%

recession

Manufacturingoutput

(left scale,Jan. 2007=100)

Rail carloads (right scale)




We noted on page 18 that the BEA revises each quarter’s GDP figures a couple of times in themonths immediately following their release. Once a year (usually in July), a broader revisionoccurs, when revised GDP figures for potentially many years in the past are released. Therevisions can be significant.

It’s the same with industrialproduction. The chart at right showsthe percentage change in industrialproduction from the previous monthfrom January 2010 through April 2012in two ways: 1) as originally released;and 2) after revisions. In somemonths the differences are minor, butin some months they are not.

For example, in its release on April 15,2010, the Federal Reserve reportedthat industrial production in March2010 was 0.1% higher than it was inFebruary 2010. Today, followingseveral revisions since then, Federal

Reserve data indicate that industrial production in March 2010 was actually 0.6% higher than itwas in February 2010, not 0.1%. More recently, industrial production in January 2012, February2012, and March 2012 were all initially reported as unchanged, but after revisions the comparablefigures are now +0.7%, +0.4%, and -0.5%, respectively.

We point this out not to be critical of the Federal Reserve, but simply as a reminder that there isoften a fundamental tension between the timeliness of economic data and their accuracy. As withpeople, with data first impressions are not always accurate.

4


The Federal Reserve release on industrial production in June 2012, which includes informationon a wide variety of industries and industry aggregates, is here. July 2012 data will be releasedon August 15.

CAPACITY UTILIZATION


Capacity utilization attempts to capture the concept of sustainable maximum output — i.e ., thehighest output a plant can maintain assuming a realistic work schedule, normal downtime, andsufficient availability of inputs to operate the capital in place.

In theory, a capacity utilization rate of, say, 70% means there is room to increase production up to100% without having to build new plants or add equipment. In practice, capacity utilization rates(at least on an economy-wide basis) never come close to 100%. Utilization levels above 82%-85% are generally considered "tight" and portend price increases or supply shortages in the nearfuture. The farther below this level, the more slack there is in the economy or particular sector.

Firms everywhere walk a tightrope when it comes to capacity. If they take too long to bring backidled capacity or build new capacity, they risk shortages and lost sales. Or, they could facehigher costs in other areas (e.g ., higher overtime costs). On the other hand, adding capacity thatends up not being used adds costs with no offsetting returns.

4As information, rail traffic data as reported in Rail Time Indicators are subject to revision up to one year following

their initial release, but the revisions are almost always insignificant.

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

Original Final

Original vs. Final Revised % Change in IndustrialProduction From Prev. Month: Jan. 2010 - April 2012

Source: Federal Reserve

2010 2011 2012

http://www.federalreserve.gov/releases/g17/Current/default.htm





What are the latest numbers? Overall U.S. capacity utilization rose to 78.9% in June 2012 from a revised 78.7% in May,

while capacity utilization for manufacturing rose to 77.7% in June from 77.3% in May (seechart below left). Over the past six months, capacity utilization, like industrial production, hasbeen up one month and down the next, with the increases washing out the decreases.

The chart below right shows recent changes in capacity utilization for several major industrial

sectors. Note the big drop in capacity utilization for iron and steel since late 2011, consistent withrecent declines in rail carloads of iron and steel products (see page 13). Capacity utilization forchemicals has been trending down over the past six months (as have rail carloads of chemicals — see page 10), but it rose in June for the first time in six months.

Utilization is one side of the capacity coin. The other side is the actual amount of capacityavailable. We’ve noted often before that the recession saw the loss of large amounts of U.S.industrial capacity, especially in manufacturing, but it might surprise you to know that U.S.manufacturing capacity is lower today than it was when the recession ended. The chart below

left shows changes in capacity for several key sectors from June 2009 (the official end of therecession) through June 2012. Total manufacturing capacity, which had fallen 2.6% from thebeginning of the recession in December 2007 through the end of the recession in June 2009, was2.7% lower in June 2012 than it was in June 2009 — i.e ., capacity continued to fall after therecession ended. The chart below right shows that manufacturing capacity has risen somewhatsince bottoming out in April 2011, but it’s still well below its February 2008 peak.

62%

64%

66%

68%

70%72%

74%

76%

78%

80%

82%

84%


U.S. Capacity Utilization: Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

Overall

Manufacturing

recession

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011


Capacity Utilization by Sector: Jan. 2007 - June 2012

2012

Paper

Chemicals

Motor vehicles Wood products

Iron & steel

92

94

96

98

100

102

104

106

108

110

112

114

2007 2008 2009 2010 2011


U.S. Industrial Capacity(Dec. 2007 = 100)

2012

Overall industrial capacity

Manufacturing capacity

Gas and electric utility capacity

Mining (including oil& gas) capacity

Total-1.1%

Manufact.-2.7%

Chemicals-8.6%

Motor

vehicles0.7%

Iron &steel-4.3% Paper

-8.4%Wood products

-11.2%

Gas & electricutilities10.0% Oil & gas

extraction12.6%

Coal mining-6.4%

Source: Federal Reserve

% Change in Industrial Capacity by Sector FromJune 2009 to June 2012





The Federal Reserve release on capacity utilization in June 2012 is here. July 2012 data will bereleased on August 15.

NUMBER OF EMPLOYED PERSONS AND UNEMPLOYMENT RATE


Released by the Bureau of Labor Statistics, the figures provide a snapshot of the strength of theU.S. labor market. Because of their visibility and political importance, they are probably the singlemost anticipated and widely publicized economic indicators in the world.

They are based on two separate surveys: 1) an “establishment survey” that uses payrolldata from around 486,000 businesses, and 2) a “household survey” of around 55,000 house-holds. The net number of jobs gained or lost in a month and employment by industry come fromthe survey of businesses. The unemployment rate, the size of the labor force, and the labor forceparticipation rate, among others, come from the household survey. The two sometimes producepuzzling results. For example, in the same month there can be a sharp drop in the unemploy-ment rate (household survey) without many new jobs being created (establishment survey).

In the United States, a gain of 150,000 or more jobs from one month to the next is generallyconsidered solid job growth. (Average monthly U.S. job growth from September 2003 throughDecember 2007 was 157,000 jobs.) Job growth of 100,000-120,000 is needed just to keep upwith the typical growth in the labor force from one month to the next.

Employment is often considered a lagging indicator because employers often decide to wait untilthey’re sure an economic recovery is here to stay before making new permanent hires. In themeantime, they might rely on more hours for existing workers or on temporary workers. Weak jobnumbers cause even the still-employed to become less confident of the future, and, therefore,less prone to spend money (see “Consumer Confidence” and “Retail Sales” below).


It could be worse: 163,000 net new jobs were created in July 2012, up from a revised 64,000 inJune 2012 and the highest monthly increase in five months (see chart below left). 5

Unfortunately, the official unemployment rate rose to 8.3% in July. The unemployment ratefor men stayed at 8.4%; the unemployment rate for women rose to 8.1% from 8.0%.

5See here for a short but interesting piece from The New York Times on why issues related to seasonal adjustment

make the July jobs report potentially less accurate than other months.

-900-800-700-600-500-400

-300-200-100

0100200300400500600

0 0 0 s

Change in U.S. Non-Farm Employment:Jan. 2007 - July 2012*

*Change from previous month. Figures are seasonally adjusted. Source : BLS

2007 20102008 2009 2011 2012

Red dots are roughly where bars would be if census-related employment were excluded.

Feb '12 259,000

Mar '12 143,000

Apr '12 68,000May '12 87,000

June '12 64,000

July '12 163,000

3%

4%

5%6%

7%

8%

9%

10%

11%

12%

U.S. Unemployment Rate: Jan. 2007 - July 2012*

The official U.S.unemployment rate rose to 8.3% in July 2012 from 8.2% in June.

*Civilian labor force, seasonally adjusted. Source: Bureau of Labor Statistics

2007 20102008 2009 2011 2012

Men

Overall

Women


http://economix.blogs.nytimes.com/2012/08/02/beware-the-jobs-report-of-july/

http://economix.blogs.nytimes.com/2012/08/02/beware-the-jobs-report-of-july/





No doubt, July’s gain of 163,000 jobs is an improvement over recent months and if we were in themidst of a normal recovery, it would bea sign of a fairly healthy labor market.But that’s not where we are. The chartat right, which we last included inNovember, shows that the number ofemployed persons peaked in January

2008 at 138.0 million, bottomed out at129.2 million in February 2010, and asof July 2012 was 133.2 million — 4.0million more than February 2010’s lowpoint and 4.8 million fewer thanJanuary 2008’s high point. In otherwords, the economy still hasn’trecovered half the jobs that were lost.

And it will be a while until it does. IfJuly’s gain of 163,000 net new jobscontinues each month into the future,it will take until December 2014 to get back to 138.0 million jobs. If job gains fall to just 100,000per month — more than the average of 73,000 jobs gained each month in Q2 2012 — it will take

until July 2016 to get back to 138.0 million jobs. Even if job growth rises to 200,000 new jobseach month, it will still take until July 2014 to get back to where we were.

Total private sector jobs rose by 172,000 in July; total government jobs, including the post office,fell by 9,000. Industries with net job gains in July 2012 included leisure and hospitality (mainlyhotels and restaurants — +27,000), manufacturing (+25,000); temporaries (+14,000); health care(+12,000); retail sales (+7,000); and transportation and warehousing (+7,000). Constructionemployment fell by 1,000 jobs in July.

Back in April 2012, we said that when an increasing number of people quit their jobs, it’s usually asign of confidence in the job market, and that was what we were seeing. Well, we take it back.The chart below left shows that the percentage of unemployed people who voluntarily left their jobfell to 6.9% in July, down from the 8.7% in March that we reported on in April.

The chart below right shows that initial unemployment claims trended downward in July and arebelow the 400,000 threshold often considered the signal of an unhealthy labor market.

Where to go for more information: The July 2012 BLS employment report is here. Data for August 2012 will be released on

September 7.

200,000

250,000300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

700,000

Weekly Initial Unemployment Claims:Jan. 2007 - July 2012

Figures are 4-week moving averages. Source: U.S. Department of Labor

2007 20102008 2009 2011 2012

400,000 is generally considered the threshold below which the economy is thought to be adding jobs at a decent pace.

128

130

132

134

136

138

140

142

Hypothetical Employment Paths

Peak = 138.0 million Jan. 2008

Trough = 129.2 million Feb. 2010

Source: Bureau of Labor Statistics

Number of Employed Persons – When Will We Return to Peak Levels?

Hypothetical

Actual

+163,000 = December 2014

+100,000 = July 2016

+200,000 per month

= July 2014

Jan. 2006 July 2012

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

Voluntary "Job Leavers" as a % of the Unemployed:Jan. 2007 - July 2012

Data are seasonally adjusted. Source: Bureau of Labor Statistics

2007 20102008 2009 2011 2012

July 2012 = 6.9%

http://www.bls.gov/news.release/empsit.nr0.htm

http://www.bls.gov/news.release/empsit.nr0.htm




CLASS I FREIGHT RAILROAD EMPLOYMENT


As in other industries, employment on freight railroads is largely a function of the level ofbusiness, though there is a not-insignificant level of seasonality (e.g ., all else equal, the numberof railroad maintenance of way employees is higher in the spring and summer than in the winter,when rail construction projects are far more difficult. Rail employment numbers are reportedmonthly by Class I railroads to the Surface Transportation Board.

What are the latest numbers? Class I freight railroad employment in June 2012 rose to 163,159. That’s its highest level since

October 2008, up 611 employees (0.4%) over May 2012, up 3,819 employees (2.4%) overJune 2011, and down 5,423 employees (-3.2%) from the November 2006 peak of 168,582 (seechart below left — figures for prior months back to November 2011 were recently revised.)

If you’re not in the rail industry, you probably don’t know that railroad employees are not coveredby Social Security but instead are covered by Railroad Retirement, a government–managedpension plan begun in the 1930s. Railroad Retirement has two components, or “tiers.” Tier I isfunctionally equivalent to Social Security, both in terms of tax rates and benefits. Tier II isfinanced by an additional payroll tax that can vary a bit from year to year but which in 2012 is12.1% for rail employers and 3.9% for rail employees. The average Railroad Retirement benefitpayable to a retired rail employee is generally higher than the average Social Security benefit,consistent with the higher taxes paid by rail employers and employees and the higher thanaverage wages a rail industry employee typically earns.

6

The chart above right shows that the rail workforce skews much older than the overall U.S.workforce. In 2010, for example, 27% of the rail workforce was at least 55 years old, comparedwith 20% of the overall U.S. workforce. For years to come, railroads will be hiring thousands ofnew employees each year to replace those who retire, in addition to any needed to handle

increased traffic volumes that railroads expect to carry in the years ahead.Where to go for more information:

The STB web site for railroad employment data is here.

6In 2010, the average U.S. freight railroad employee had annual wages of $73,000 and annual total compensation of

$103,120. Comparable figures for the average U.S. full-time employee were $53,000 and $66,000, respectively.

135,000

140,000

145,000

150,000

155,000

160,000

165,000

170,000

Class I Railroad Employment: Jan. 2005 - June 2012

Beginning in January 2010, the bars in this chart are around 1,000 employees higher than inprevious months due to the inclusion of employees fr om two large railroads acquired by aClass I railroad. Data are non-seasonally adjusted. Source: STB

2005 2006 2007 2008 2009 2010 2011 2012

May 2012 toJune 2012: +611

0%

5%

10%

15%

20%

25%

30%

<24 25-34 35-44 45-54 > 55

Age

U.S. rail workers

All employed civilians

Source: Railroad Retirement Board, BLS Data are for 2010.

Age Distribution of U.S. Rail Employeesvs. U.S. Civilian Workforce

http://www.stb.dot.gov/econdata.nsf/322683bcf67f4143852566210062ac90?OpenView

http://www.stb.dot.gov/econdata.nsf/322683bcf67f4143852566210062ac90?OpenView




CONSUMER CONFIDENCE


The two best known surveys of consumer confidence come from the Conference Board and fromThomson Reuters / the University of Michigan. They are based on monthly interviews withseveral thousand people and are designed to gauge the financial health, spending power, andconfidence of the average U.S. consumer. The theory is that the more confident consumers areabout their job prospects, income, etc., the more likely they are to buy stuff, especially big-ticketitems. As David Wyss (the chief economist at Standard & Poor’s) has said, “A confidentconsumer buys a new car. A cautious consumer repairs the old one.”

Consumers’ attitudes are most heavily influenced by various economic factors, such as theunemployment rate, income, and gasoline prices. Because there is always going to be some“noise” and month-to-month volatility in consumer confidence, trends are more important than asingle data point. In addition, consumers’ sentiment is likely to be influenced by the tone andfrequency of what they hear or read (on television, in newspapers, on the Internet, etc.), ratherthan solely by the economic fundamentals they face or think they will face.


The Conference Board’s consumer confidence index rose to 65.9 in July 2012 from 62.7 in

June, its first increase after four straight monthly declines (see chart below left). A reading of 90or above is generally thought to indicate a healthy economy.

Meanwhile, the Thomson Reuters/University of Michigan index of consumer sentiment fellfor the second straight month in July, to 72.3 from 73.2 in June (see chart below right).

What the Conference Board said about its July index: “Despite this month's improvement inconfidence, the overall Index remains at historically low levels. Consumers' attitude regardingcurrent conditions was little changed in July, but their short-term expectations, which had declinedlast month, bounced back. However, while consumers expressed greater optimism about short-

term business and employment prospects, they have grown more pessimistic about theirearnings. Given the current economic environment — in particular the weak labor market —consumer confidence is not likely to gain any significant momentum in the coming months”

What Thomson Reuters/Univ. of Michigan said about its July index: “Consumer confidenceslipped in July, with all of the overall decline in how consumers viewed future prospects for thenational economy. The good news is that consumers do not expect the economic slowdown toprompt an economy-wide recession; the bad news is that consumers do not expect the pace ofeconomic growth to revive job and income prospects.”

0

10

20

30

40

50

60

70

80

90

100

110

120

Conference Board Index of Consumer Confidence:Jan. 2007 - July 2012

(1985 = 100)

2007 2008 2009 2010 2011 2012

Source: Conference Board

2007 2008 2009 2010 2011 2012

Up to 65.9 in July from 62.7 in June.

0

10

20

30

40

5060

70

80

90

100

110

120

Thomson Reuters/Univ. of MichiganIndex of Consumer Sentiment: Jan. 2007 - July 2012

2007 2008 2009 2010 2011 2012

Source: Thomson Reuters/University of Michigan

2007 2008 2009 2010 2011 2012

Down to 72.3 in July from 73.2 in June.




The charts above show two other gauges of consumer or business confidence. The “SmallBusiness Optimism Index” is based on a monthly survey of several hundred randomly-chosenmembers of the National Federation of Independent Business. The “Daily Economic Confidence

Index” is based on daily Gallup telephone interviews with approximately 1,500 adults nationwide.Both are generally consistent with the Conference Board and TR/U of M indexes.


The Conference Board’s press release on July’s consumer confidence index is here; August’s will be released on August 28. The Thomson Reuters/U. of Michigan summary report for July is here.

RETAIL SALES


The Census Bureau surveys 5,000 retailers of all types to track the dollar value of physicalmerchandise sold. The data are adjusted for holiday differences and seasonal variations but are

not adjusted for inflation. Personal consumption accounts for approximately 70% of U.S. GDP.Thus, the health of the economy depends largely on how much goods and services people buy.

What are the latest numbers? U.S. retail sales fell in June 2012 for the third straight month, the first time that’s happened

since the last three months of 2008. Retail sales of $401.5 billion in June were 0.5% ($1.9 billion)lower than in May.

-70

-60

-50

-40

-30

-20

-10

0

Gallup Daily Economic Confidence Index:Jan. 2008 - July 2012

Data are 3-day rolling averages. Source: Gallup

2008 2009 2010 2011 201270

75

80

85

90

95

100

Small Business Optimism Index:Jan. 2007 - June 2012

(1986 = 100)

Source: National Federation of Independent Business

2007 2008 2009 2010 2011 2012

$310

$320

$330

$340

$350

$360

$370

$380

$390

$400

$410

$420

Data are seasonally adjusted but are not adjusted for inflation. Source: Census Bureau

Total Retail Sales: Jan. 2007 - June 2012($ billions)

2007 2008 2009 2010 2011 2012

$401.5 billion in June 2012

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Data are seasonally adjusted but are not adjusted for inflation. Source: Census Bureau

% Change in Total Retail Sales from Previous Month:Jan. 2007 - June 2012

2007 2008 2009 2010 2011 2012

June 2012: -0.5%

http://www.conference-board.org/press/pressdetail.cfm?pressid=4559

http://thomsonreuters.com/content/financial/pdf/i_and_a/438965/2012_07_27_slower_job_growth_and_higher_food_prices.pdf



http://www.conference-board.org/press/pressdetail.cfm?pressid=4559




NEW LIGHT VEHICLE SALES


Data cover U.S. sales of cars and light trucks, including pickups and SUVs. Over the past 50years, spending on motor vehicles has accounted, on average, for about 3.7% of U.S. GDP.Monthly auto sales are often referred to in terms of seasonally-adjusted annualized rates (SAAR).In 2011, 6% of U.S. Class I railroad gross revenue came from hauling autos and auto parts.

What are the latest numbers? New light vehicle sales (passenger cars, SUVs, minivans, and pickups combined) were an

annualized 14.0 million in July 2012, down from a revised 14.3 million in June 2012 (see chartbelow left) and up 13.6% over July 2011 (see chart below right). After rising steadily in thesecond half of 2011, light vehicle sales have essentially plateaued for the past five months.

Analysts blame the usual suspects for the fact that vehicle sales aren’t higher: weak consumerconfidence, anemic job growth, uncertain tax policy, and higher savings rates, for example.

Ever the optimists, at least in public, major automobile manufacturers are predicting higher salesin the second half, in part because they think their lineup of new models will be appealing toconsumers. We hope they’re right, but economic fundamentals will continue to play the key role.The chart on the bottom left, which we show every once in a while, shows the relatively strongnegative correlation between light vehicle sales and the unemployment rate.

6

7

8

9

10

11

12

13

14

15

1617

18

New U.S. Light Vehicle Sales: Jan. 2007 - July 2012*(seasonally-adjusted annualized rate in millions)

*Data include passenger cars, SUVs, minivans, and pickups. Source: BEA

2008 2009 20102007 2011

"Cash For Clunkers"

2012

14.0 million in July 2012

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Data are based on seasonally adjusted annual rates for each month. Source: BEA

Year-Over-Year % Change in U.S. Light Vehicle Sales:Jan. 2007 - July 2012

2007 2008 2009 2010 2011 2012

July 2012: 13.6%

Distorted by "CashFor Clunkers"

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

32,000

400

600

800

1,000

1,200

1,400

1,600

U.S. Light Vehicle Sales vs. U.S. + Canadian RailCarloads of Motor Vehicles & Equipment

*Passenger cars, SUVs, minivans, and pickups in 000s, 4-month moving avg. Rail carloads areweekly avgs per month, 4-month moving avg. Data are not seasonally adjusted. Source: AAR, BEA

correlation = 91%

2008 2009 20102007 2011 2012

Bars = vehicle sales*(left scale)

Line = rail carloads(right scale)

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%7

8

9

10

11

12

13

14

15

16

17

18

U.S. Light Vehicle Sales vs. Unemployment Rate*

*Passenger cars, SUVs, minivans, and pickups. Data are seasonally adjusted. Source: BEA, BLS

2008 2009 20102007 2011

correlation = -75%

2012

Unemployment rate (right scale)

Light vehicle sales*(left scale)




There has been a spate of newsreports recently on the (we hope)nascent recovery in the housingsector (see the section on housingstarts below), and several of thosereports have mentioned a connectionbetween a housing recovery and

higher sales of pickup trucks, whichcomprise the majority of the “lighttruck” portion of vehicle sales. Just forfun, we graphed light truck sales andhousing starts. The results are shownin the chart at right. There really is apositive correlation, especially overthe past three and a half years.


BEA data on auto sales are here.

HOUSING STARTS


A housing start is beginning the foundation of a residential home. Historically, housing hasdirectly accounted for around 5% of the overall economy and has large spillover effects on othersectors (such as retail sales and manufacturing), since people buying new homes tend to spendon other goods such as furniture, lawn and garden supplies, and appliances.

Since January 2006, single family homes have accounted for 79% of housing starts and multi-family buildings 21%. Housing starts, especially for multi-family buildings, often fluctuateconsiderably from month to month, so trends are more important than a particular point in time.

What are the latest numbers? Seasonally adjusted housing starts totaled an annualized 760,000 in June 2012, up 6.9%

from a revised 711,000 in May 2012 (see chart below right) and up 23.6% over June 2011 (seechart on the top left of the next page). July marks the most housing starts since October 2008and is a continuation of a very slow recovery over the past seven or eight months.

0

200

400

600

800

1,000

1,200

1,400

1,600

U.S. Housing Starts: Jan. 2007 - June 2012(seasonally-adjusted annualized rate, 000s)

Source: Census Bureau

2007 2008 2009 2010 2011 2012

Single-family units

Multi-family units

Total

About what a healthyhousing market would be

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

% Change From Previous Month inU.S. Housing Starts: Jan. 2007 - June 2012


2007 2008 2009 2010 2011 2012

June 2012: +6.9%

0

200

400

600

800

1,000

1,200

1,400

1,600

0

2

4

6

8

10

12

14

16

18

U.S. Light Truck Sales vs. Housing Starts*

Light trucks are SUVs, minivans, and pickups in millions at seasonally adjusted annual rates.Housing starts in thousands at seasonally adjusted annual rates. Sources: BEA, Census Bureau

2008 2009 20102007 2011

correlation = 84%

2012

Housing starts (right scale)

Light truck sales*(left scale, millions)

http://www.bea.gov/national/xls/gap_hist.xls

http://www.bea.gov/national/xls/gap_hist.xls




Back in June we quoted a housing market analyst who had said, “It’s very clear now that thehousing market has turned a corner. The only question is how strong the rebound is going to be.”We were skeptical, noting that people have said similar things many times over the past fewyears. But this time, maybe our skepticism was unwarranted. Consider:

The National Association of Home Builders recently announced that builder confidence in

the market for newly built, single-family homes rose six points to 35 in July 2012, bringingthe index to its highest level since March 2007. The index was at 15 in July 2011.

S&P/Case-Shiller recently announced that housing prices rose in May from April in all 20metropolitan areas it tracks. Average prices rose 0.9%, their fourth straight increase.

New homes under construction rose to 482,000 (annualized) in June 2012, up from472,000 in May and 464,000 in April (see chart below left). The trend has been slowlybut clearly upward since the end of 2011.

Total construction spending rose 0.4% in June 2012 to $842.1 billion (see chart belowright), reaching its highest level since November 2009.

In short, the chief economist of the National Association of Home Builders could very well be rightwhen he recently said, “Housing — though still in a fragile stage of recovery — is returning to its

more traditional role of leading the economy out of recession.” Unfortunately, because thehousing sector is a shadow of its former self, even if it booms — which isn’t going to happenanytime soon — its effect on the economy won’t be huge. Still, every little bit helps.


The Census Bureau’s press release on housing starts in June 2012 is here.

0

250

500

750

1,000

1,250

1,500

U.S. Housing Units Under Construction:Jan. 2007 - June 2012

(seasonally-adjusted annualized rate, 000s)


2007 2008 2009 2010 2011 2012

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

% Change in U.S. Housing Starts From the SameMonth Previous Year: Jan. 2007 - June 2012


2007 2008 2009 2010 2011 2012

June 2012: +23.6%

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

12,000

13,500

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

U.S. Housing Starts vs. U.S. + Canadian RailCarloads of Lumber, Wood & Forest Products

Data are seasonally adjusted. Housing starts are monthly figures annualized. Rail carloads areaverage weekly originations for the month. Source: AAR, Census Bureau

2007 2008 2009 2010 2011 2012

Rail carloads (right scale)

correlation = 96% Housing starts

(left scale, in 000s)

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

U.S. Construction Spending: Jan. 2007 - June 2012(seasonally-adjusted annualized rate, $ millions)


2007 2008 2009 2010 2011 2012

http://www.census.gov/construction/nrc/pdf/newresconst.pdf






CONSUMER PRICE INDEX (CPI)


The CPI is the benchmark inflation guide for the U.S. economy. It measures the changes in thecost of a representative basket of consumer goods and services. The BLS collects prices frommore than 20,000 retail and service establishments throughout the country.

The “CPI for All Urban Consumers” (CPI-U) is the inflation index you usually read about, but the“core” CPI — CPI less food and energy — is also commonly used. That’s because while foodand energy are a big part of most household budgets, their prices tend to change often and/ordramatically, and a big price change in one period is often not followed by another large changein the same direction in the following period. Thus, it’s thought that leaving them out can beuseful in assessing broader inflation trends.

It’s hard not to have at least some inflation when an economy is growing, but inflation can harmeconomies in many ways. Just one example: it confuses price signals — producers don’t know ifhigher prices are part of an inflation-related adjustment, or if they signal higher demand thatwarrants expanded production. The Federal Reserve’s target for inflation for the U.S. is 2%.


The overall CPI was unchanged in June 2012 as a drop in the price of energy and transpor-tation was offset by increases (albeit small ones) in the prices of just about everything else. Forthe year ending in June, the overall CPI was up 1.7% — the same as the month before and equalto the lowest year-over-year increase since January 2011 (see chart below right). CPI excludingfood and energy was up 0.2% in June 2012 and up 2.2% for the year ending in June 2012.

Energy prices fell for the third straight month in June (see the top left chart on the next page),thanks largely to a decline in gasoline prices (see the top right chart on the next page). Theaverage nationwide price of gasoline in the week ending June 2 was $3.73. For the week endingJune 30, it was $3.49, or 23 cents lower. As the chart on the top right of the next page shows,

though, average gasoline prices were about 15 cents higher in July than in June, which will putupward pressure on the CPI for July. (July’s CPI will be released August 15.)

You’ve probably heard that a severe drought and extremely hot weather in major grain-growingareas in July turned what a month ago was a very promising harvest into something much lessthan that. How much less won’t be known for sure until the harvest, but the damage is thought tobe considerable. The USDA reports, for example, that during the two weeks ending July 24, 64%of the contiguous United States was experiencing drought conditions. It was even worse inmajor grain producing areas: in the two weeks ending July 24, nearly 90% of the nation’s cornand soybeans were in locations experiencing drought.

-2.0%

-1.6%

-1.2%

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%

Month-to-Month Change in the Consumer Price Index:Jan. 2007 - June 2012*

2007

*Urban consumers, U.S. city avg. seasonally adjusted. Source: Bureau of Labor Statistics

2008 2009 2010 2011 2012

Bars = overall

Line = excludingfood and energy

Overall CPI was flat in June 2012.

CPI excluding food and energy was up 0.2% in June 2012.

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Year-Over-Year Change in the Consumer Price Index:Jan. 2007 - June 2012*

2007

*Urban consumers, U.S. city average. Source: Bureau of Labor Statistics

2008 2009 2010 2011 2012

Bars = overall

Line = "core" (excludesfood and energy

Overall CPI was up 1.7% and "core" CPI was up 2.2% in the year ending June 2012.




It’s axiomatic that when the supply of something in demand goes down, the price goes up, andthe price of corn and soybeans has, in fact, risen sharply in recent weeks. That, in turn, meanshigher food prices down the line. The USDA says (see here) that “any effect on retail prices

would depend on the severity of the drought and would begin to appear on supermarket shelvesin the fall.” The USDA also notes:

“We will likely see impacts within two months for beef, pork, poultry and dairy (especiallyfluid milk). The full effects of the increase in corn prices for packaged and processedfoods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail foodprices.”

“The drought has the potential to increase retail prices for beef, pork, poultry, and dairyproducts first and foremost later this year and into 2013. But in the short term, droughtconditions may lead to herd culling in response to higher feed costs, and short termincreases in meat supply. This could decrease prices for some meat products in theshort-term. That trend would reverse after time after product supplies shrink.”

“Historically, if the farm price of corn increases 50 percent, then retail food prices as

measured by the …CPI increases by 0.5 to 1 percent. More generally, as an overallcommodity price index increases, about 14 to 15 percent of that increase is passed on toretail prices for products thatuse that commodity as aningredient.”

Food and beverages account for onlyaround 16% of the CPI, so drought-induced food price increases bythemselves wouldn’t cause the CPI toskyrocket. The chart at right showsthat over the past nine months, theincreases in the food component of theCPI have been moderate. Still, foodprices, like gasoline prices, aresomething that consumers tend to payattention to — and complain about.

Where to go for more information: The BLS press release on the June

2012 CPI is here. The July CPI will be released on Aug. 15.

-20%-18%-16%-14%-12%-10%-8%-6%-4%-2%0%2%4%6%8%

10%

Month-to-Month Change in the Consumer Price Indexfor Energy: Jan. 2007 - June 2012

2007


2008 2009 2010 2011 2012

June 2012: -1.4%.

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Month-to-Month Change in the Consumer Price Indexfor Food: Jan. 2007 - June 2012

2007


2008 2009 2010 2011 2012

June 2012: +0.2%.

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

2006 2007 20092008 2010 2011 2012

*Average all grades per gallon incuding taxes. Source: EIA

Average Weekly U.S. Gasoline Price*

Week ending July 2, 2012: $3.42Week ending July 30, 2012: $3.57

http://www.ers.usda.gov/newsroom/us-drought-2012-farm-and-food-impacts.aspx

http://www.bls.gov/news.release/cpi.nr0.htm



http://www.ers.usda.gov/newsroom/us-drought-2012-farm-and-food-impacts.aspx



RAIL FREIGHT CARS IN STORAGE


A freight car is “in storage” if it has had a loaded revenue move since 2005, but not in the past 60days. Rail cars are stored when they are not needed due to lack of demand; they come out ofstorage when demand improves. Figures are for the entire North American rail freight car fleetand include rail cars owned by railroads, leasing companies, shippers, and others. The totalfreight car fleet changes from month to month as new cars are added and old cars are scrapped.

There is a great deal of complexity in freight car usage patterns. For example, increases indemand for rail service for a particular commodity relative to another mean that some car typesmight be in very short supply at the same time that others are plentiful; a freight car might gothrough cycles where it is stored for a few months and then returned to service for a few months;and changes in scrap prices might make scrapping cars more attractive at one time than another.


As of August 1, 2012, 314,971 freight cars were in storage, a decrease of 2,710 from July 1,2012, and equal to 20.6% of the North American fleet, excluding cars without a load sincebefore 2005 (see charts below). With the recent improvement in coal traffic, the decrease in thenumber of gondolas and open hoppers in storage was sufficient to end the 9-month streak of

increases in total cars in storage. Of the 502,853 cars that were in storage on July 1, 2009 (excluding those that last moved loaded

prior to 2005), only 41,907 remained in storage continuously through August 1, 2012. Nearly92 percent of the cars that were in storage at the peak have either carried a load since then (andperhaps subsequently returned to storage) or been scrapped.


Contact Frank Hardesty ([email protected], 202-639-2321). Media inquiries should go to Holly

Arthur ([email protected], 202-639-2344).

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

North American Freight Cars in Storage

Data are as of the first of the month; % are cars stored as % of total fleet. Source: AAR

Mar-Dec '09 2010

20.6% of the fleet

n/a

2011 2012

31.9% of the fleet

-35,000

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

Change in Number of Freight Cars in Storage

Figure for Jan. 2011 = difference in cars in storage on Feb. 1, 2011 compared to cars in storage onJan. 1, 2011; other months calculated similarly. Source: AAR

May-Dec '09 2010 2011 2012

AAR Rail Time Indicators - August 2012

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