Trading Nation

Rail rout could be sending bad signs about the US economy

Trading Nation: US economy off the rails?
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Trading Nation: US economy off the rails?

Shares of Union Pacific dropped nearly 7 percent Thursday after reporting its sixth consecutive quarter of earnings-per-share decline. And Union Pacific's fellow rail stocks slipped along with it; shares of CSX, Norfolk Southern and FreightCar America all fell in Thursday trading.

This decline in the rails could be sending negative signs about the state of the economy.

Union Pacific also reported a drop in operating revenue year over year and a decrease in volume as measured by total revenue carloads. Shipments of agricultural products declined in 5 of its 6 business groups, including coal and chemical shipments, down 19 and 1 percent, respectively.

"Honestly, if you look at [shipment] volumes over the last couple of years, you would be very worried about where we are headed," Justin Long, managing director and research analyst at Stephens, said Thursday. He believes that rails can be a good indicator of the overall economy's health, given the group of commodities they carry.

"If you break down the different commodity groups right now, and look at the underlying demand environment, it would be indicative of a slowly growing economy," Long told CNBC in a phone interview.

Long maintains a buy rating on Union Pacific. Despite longer-term growth worries in the rails — "You could make the argument that we've been in a 'freight recession' the last year and a half to two years," he said — Long sees near-term strength in coal and grain, and room for volume growth in 2017.

Union Pacific said in its third-quarter report that the company faces macroeconomic challenges like "an unstable global economy, the relatively strong U.S. dollar and continued soft demand for consumer goods."

Some may argue that rails are not the best gauge of the economy.

"I don't believe the transports right now or the rails in particular are telling us something any different than they did a year and a half or two years ago," David Seaburg, head of sales trading at Cowen and Co., said Thursday on CNBC's "Power Lunch."

Seaburg recommends looking instead at the truckers; "The trucks will tell you what's going on in the economy."

On a global level, the school of thought that the health of railroad stocks tracks the health of the overall economy may hold true.

"When you think of it from a global macro perspective, we are starting to see some serious cracks in global growth," Boris Schlossberg, managing director of FX strategy at BK Asset Management, said Thursday on "Power Lunch."

Schlossberg pointed to a miss in industrial production in China this week, a "massive" miss in Australia's employment numbers and central bank leaders' recent warnings about "structural" issues with global trade, referring to recent remarks by Bank of Canada Governor Stephen Poloz.

"So there are clearly some warning signs out there that I think something is slowing down, whether it just simply pauses and refreshes, or really we're going to start to fall off a cliff; I think is too early to tell," Schlossberg said.

Analysts on average give Union Pacific a rating of overweight, and a bullish average target price of $101.25, according to FactSet estimates.