This Vicious Cycle is What Bedevils the US Economy

Railroads slash capital spending, but plow more money into buying back own shares, after two years of Freight Recession.

CSX reported quarterly earnings late Wednesday. Revenues increased 9.5% from the terrible quarter a year ago, which had been the worst quarter in terms of revenues since Q1 2010! So it’s no big feat to beat last year’s fiasco quarter. At $2.87 billion in Q1 2017, revenues are sill 5.3% lower than they’d been in Q1 2015. This time, moribund coal shipments had increased.

Since March, there’s a new guy at the throttle. Hunter Harrison is known as a cost cutter. And that was the theme of the earnings announcement. The railroad said that it plans to cut costs further. It had already slashed its capital spending plans for 2017 by 18% to $2.2 billion. Now more cuts for 2017 are likely.

But in the same breath, it announced that it would plow $1 billion into buying back its own shares. Stocks jumps.

Wall Street loves that – without considering the broader ramifications: Cuts in capital spending turn into lower revenues for their suppliers. But CSX isn’t the only one.

Railroad revenues have been dropping since their peak in 2014. In this, they’re a poster child for the quintessential large US corporation, including Big Tech, such as glamorous IBM.

The table shows the debacle the seven largest freight railroads active in the US face, in order of their 2016 annual revenues. Note that CSX and Norfolk Southern used to be #3 and #4 on this list. But thanks to their respective 12.6% and 14.7% revenue plunges over the past two years, they have been surpassed by Canadian National, whose revenues edged down less than 1% over the period.

In total, combined revenues declined by $6.4 billion in 2016 and by $11.4 billion, or 12.3%, for the two-year period.

And so big spending cuts were announced in January. The seven Class 1 freight railroads will slash capital spending by 11%, from $16.7 billion in 2016 to $14.9 billion in 2017. And they might cut still more, once CSX’s new CEO is done digging through the numbers, and other railroads might follow with more cuts of their own to please Wall Street.

Railroad capital spending goes into the expansion and maintenance of the network of tracks, the largest outlay a railroad faces, the purchase of locomotives and rolling stock, and other things, including this year, developing and installing automatic braking systems that regulators have been clamoring for and that are required by the end of 2018. Since railroad capital spending is so large, that’s where big cost cuts can be found.

Union Pacific slashed its capital spending budget by 11.4% from $3.5 billion in 2016 to $3.1 billion in 2017. Over half of the 2017 budget will go into its infrastructure. It also includes $300 million to implement the new automatic braking system. Its previous plan to acquire 100 locomotives in 2017 as part of a purchase commitment was cut to 60 locomotives. Delivery of the rest will be delayed till 2018. Last May, I pointed out the haunting sight of 292 Union Pacific engines idled in Arizona Desert.

BNSF has budgeted $3.4 billion for 2017 capital spending, down 12.8% from last year. Of that amount, it plans to spend $2.4 billion on improving its tracks; $400 million on expansion projects; $400 million for locomotives, freight cars, and other equipment; and $100 million on implementing the automatic braking system.

This chart shows capital spending for 2016 (blue) and the budget for 2017 (red):

But plans could change, and costs could be cut further. CSX will likely lead the way. Wall Street loves that.

Spread across the spectrum, all cuts in capital spending – from locomotives to railroad ties – translate into falling revenues for other companies. And then they too will cut cost to grapple with their own falling revenues.  And so on. The vicious cycle of dropping corporate revenues that trigger cuts in capital spending that translate into more drops in revenues… are exactly what bedevils this economy.

But hey, they can always make it up with share buybacks.

Railroads transport many of the 17 million or so new vehicles from the plant or from the port to the city where they’re sold. Could this be the next brake shoe to drop? Read…  Meltdown of Houston Auto Sales Has Eerie Financial Crisis Look

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  48 comments for “This Vicious Cycle is What Bedevils the US Economy

  1. Willy2 says:

    – Cut CAPEX spending even more and more and somewhere down the road the entire railroad system breaks down.
    – The “Transports” ($TRAN) have been underperforming the Dow Jones since say december 2014. NOT a good sign.

  2. I am curious if there is a correlation with the slowdown in Retail sales and the slow in rail transportation?

    What happens to the rail road companies if the pipeline is built?

  3. unit472 says:

    What do the railroads haul that needs more capacity? Coal production either for domestic use or export seems moribund and with Trump greenlighting new pipeline construction hauling crude oil via rail may have hit its zenith. Same with autos if the years of 17 million plus sales are in the rearview mirror.

  4. Dan Romig says:

    Wolf, how do the railroads set transport charges based upon diesel fuel costs? Just wondering if the drop in diesel cost relates to a drop in revenue.

    • Wolf Richter says:

      Fuel surcharges worked wonders to enhance revenues in trucking, and railroads jumped on it too. This was when fuel prices where sky high …. before mid-2014. Now fuel prices have collapsed, but guess what? The fuel surcharges remain.

      Here is Union Pacific spelling it out:

      “Dear Intermodal Customer: As information, the Union Pacific weekly intermodal fuel surcharge is 17.5% for the week of April 24, 2017 – May 1, 2017. Please refer to the UP website for future publication of our weekly fuel surcharge.”

      For get weekly updates on their “temporary fuel surcharges:

      • Lee says:

        Same with flights out of Australia by the big Australian carriers – they put the fuel surcharge on and never took it off.

        What they did here was ‘blend’ it into the regular ticket price so that it doesn’t show up.

        It is even worse if you use your frequent flyer miles. It is sometimes cheaper to buy a regular ticket than pay the fuel surcharge, taxes, and extras for the so called ‘free flight’.

        When I bought a business class fare for the kid back to Japan the extras on that ticket were 1/5th of what it would have cost me for using the frequent flyer points on an Aussie airline for an economy ticket!!

  5. James says:

    Can someone explain how rail is in a recession while the US manufacturing sector is supposedly surging?

    Are manufacturers using trucks?

    • Scott says:

      Coal has historically been one of the biggest sources of revenue for railroads and it’s usage in power generation has plummeted over the past few years. Crude by rail seemed to prop up some of the revenue for a while, but the decline in prices combined with the building of pipelines in North Dakota has reduced that revenue as well.

      This is why the US-based railroads suffered more. Union Pacific and BNSF carry coal from the Powder River Basin east and CSX and Norfolk Southern carry Appalachian coal to plants in the Midwest and South. At least some of the decline in capex is due to fact that coal isn’t coming back and the railroads are adjusting their business models accordingly.

      It also suggests that perhaps the manufacturing sector may not be doing as well as cheerleaders would like us to believe.

      • economicminor says:

        They could be hauling more of the freight that the trucks haul but they would have needed to make major changes and additions to their infrastructure. Politics has kept this from happening.. Politics is a big word but there needs to be a National rail policy that included new easements but Congress has only been able to increase spending on the military and very little on infrastructure.

        Politics since Reagan has been about Privatization but there are things that the Private Sector just can not do. We could save lots of carbon by being more efficient but that would eat into oils pockets.

        It is all about money and influence.

        I’m sure that the failing of the real economy isn’t doing RR much good either..

    • Frederick says:

      How is it possible that domestic manufacturing is surging with the dollar so strong I think you’re believing the bogus govt numbers just like the fools buying into the stock market today

    • Enquiring Minds Wish To Know says:

      Where did you here that manufacturing was surging? Just what are they making that people are buying?

  6. beadblonde says:

    Read just published “Glass House” by Brian Alexander. There really is no hope; U.S. is corrupt beyond fixing. The pigs call it “unlocking shareholder value.”

    • Frederick says:

      I totally agree There is NO hope as long as the sheeple allow the shearing to continue unabated

      • economicminor says:

        Exactly what are the Sheeple suppose to do to stop the shearing?

        Writing your Congress sure doesn’t help.

        They might listen if you put in a check for $50k or so.. but then the biggest check wins and there is no way our check can beat those who already have access and privilege.

        • Jerry Bear says:

          Why don’t people keep track of what their Congessthings are doing and vote those who dont represent the people out of power? As long as the masses keep electing the same old crooks, America will keep stumbling and lurching to its doom.

          The crux of the problem is the American people vote stupidly, They refuse to go beyond the Mass Media to see what is happening behind the scenes. I fear our nation will end, not in A bang, not in a whimper, but in a giant Duh! of stupidity.

        • economicminor says:

          “vote those who dont represent the people out of power”

          BECAUSE the Parties only give us insiders to vote for.. So we get a choice between Insider A, B or C… A lot of good that does us..

          “The crux of the problem is the American people vote stupidly”
          They vote between the choices given them.. The smart vote would be to write in None of the Above…

        • d says:

          “The smart vote would be to write in None of the Above…”

          The smart vote would be to write in “Term limits for House and Senate”

          “None of the Above”

          Offers no option and makes no demand of the system.

  7. OutLookingIn says:

    DOW Transports ($TRAN) has rolled over and is now down.
    The two commodities indexes ($CRB) and (DBL) are down hard.
    The Baltic Dry Index ($BDI) has rolled over and is continuing its three year down trend.
    Imports continue to exceed exports at the busiest container terminals.
    The world wide clean up from the Hanjin bankruptcy continues.

    These are SOME of the weak to absolutely poor fundamentals that cannot be ignored. They may be swept under the propaganda carpet by the financial MSM for a little longer, but eventually will surface. Taken in context with this article, they paint a far different portrait than what some main stream analysts show. The wake up will be epic.

    • OutLookingIn says:

      Case in point Re: Financial Propaganda –

      The just released Fed’s Beige Book Report.

      A work from “Fantasyland” full of bogus, wishful statistics that have no real bearing on what is the true picture of the economy.

  8. akiddy111 says:

    In keeping with data and analysis on the Transportation Industry, it might be helpful to know that sales of heavy duty (class 8) trucks were down a whopping 29% in North America in 2016.

    • TheDona says:

      Probably lots of used trucks out there bing picked up for cheap….hence the huge drop in new truck production.

      • d says:

        Low milage relativly new trucks are frequently booby traps, as they come from failed/failing operators who have not maintained them properly, or they are in fact not low milage, they just have low milage reading’s.

        The huge drop in production is there is global over capacity, and the chinese and indians are still adding MORE.

        You have 5 big guys, and 2 little guys trying to feed off of a pie thats only big enough for 5 and 3 other also ran groups from russia india and china with huge state support to keep them fed, whilst they drive the other 7 bankrupt, by dumping with massive state support.

        Euro consolidation seems to have stopped after the Volvo, VW, Daimler, Paccar, and Iveco consolidations, fiat being the also ran . Small Nissan and Isuzu, are slowly getting closer to total badge engineering. Not sure what will finaly happen there as Volvo own UD which is Nissan Heavy. There are still 5 car and truck makers in Japan, although they all have relationship with other manufacturers that is still to many.

        Logically Iveco or fiat chrysler have to get eaten next, probably fiat. AndIsuzus continuationa s abran dname is still rocky Athough as a manfacturing unit it still has potential. The Isuzu relationship with GM did not work for it.

  9. r cohn says:

    And Trump wants to slash the corporate income tax .
    Will the resulting increase in cash flow result in a boom in corporations’ CAPEX?
    Hardly likely considering corporations (like the railroads) already are having trouble finding productive uses for their cash and are using their monies to increase dividends , stock buybacks and executive stock grants.
    So lower corporate tax rates will mainly benefit top executives and those who own shares
    And who is that?Institutions and the top 1%
    Lower corporate tax rates will only serve to exacerbate the wealth inequality in this country and hasten an uprising by the have nots

    • TJ Martin says:

      …. does any of this comes as a surprise ? Errr … not to anyone with so much as a modicum of common sense as well as a disdain for conspiracy addled theories , alt facts , cognitive dissonance and reality distortion

    • Jerry Bear says:

      It isn’t just “wealth inequality”, it is the huge increase of monopoly or closely cooperating oligopolies that have created this inequality in the first place. Once you have effective monopoly control of major sectors of the economy, you no longer have free market Capitalism, no longer have competition, and you instead have corruption and privilege in control of society.

      • d says:

        “Once you have effective monopoly control of major sectors of the economy, you no longer have free market Capitalism, no longer have competition, and you instead have corruption and privilege in control of society.”

        Do you understand Organisational Culture?

        Globalisation was enabled, with out first laying out globally consistent rules. That everybody had to abide by. Or be locked out of the system.

        Another “Duh Stupid” American Moment.

        What we have developing from this , is a group Of Globalised Vampire Corporates, currently allied with china. Currently Headquartered mostly in America, for connivence.

        These corporates have Cultures. Most of their Cultures. Do not give the interest of the general population of the planet, or the planets ecology, any consideration. They are all simply resources, to be Consumed, as the Entities, see fit.

        These Corporates and Corporate Funds “Blackrock” and others, (some unnamed and unknown). Are Perfectly Happy. For the populace to keep on blaming, Banksters, Central Bankers and Poloticians, All of which they basically control indirectly (in America at least).

        For the social and economic problems that are developing in their countries. Whilst these Vampire Corporates continue to grow.

        These effectively unregulated Corporates. Operating “Offshore” Everywhere. Paying full tax nowhere, except in china. Are the most dangerous Entities outside CCP china, this planet has ever been faced with.

        They, with CCP china, are slowly taking control of this planet. Not “Bankster’s”. By slowly owning everything of value on it. There is not one publicly traded entity of any consequence on the planet Blackrock does not own part of. Blackrock owns (APP) 1% of all publicly traded entities on the planet. If these Vampire Corporates are not stopped. The planet will not be a very nice place to be, Anywhere.

        In the west, the left that campaigns against “Banker’s”, and Capitalists. Promising more FREE FREE FREE, to the masses. Is actually Aiding these Corporates and china.

        As everybody is blaming the same soft, incorrect targets. The only part of the correct target, vaguely on the lefts radar, is continuous massive chinese trade surplus.

        “Do you understand Organisational Culture?”

        The question had a purpose. The people who are the Figureheads of these Globalised Vampire Corporates and Mafia States, only stay there, as long as they conform to the Culture of the entity.

        Those who came after Stalin didnt change the culture of “the beast” they couldn’t. It had to be suddenly collapsed to change. As there was no vestige of democratic process to attempt to effect non violent Gradual/Progressive change.

        Unfortunately the USSR Morphed into an Authoritarian “Mafia State”. Just as the “Communist of Connivence” in china have. Without the fake Democracy Russia hold’s up. As a SmokeScreen. To shield the real Mafia State. In power above the Fake Democracy.

        Just as removing the Figurehead in Germany from 1932-1945 would have changed nothing without completely Exorcising his organisation. As proven by doing so.

        Changing the figureheads in, Moscow, Tehran, Beijing, DPRK, Blackrock, Goldman Sacks, JPMC, Or various of the Globalised Vampire Corporates. Will achieve nothing. Without changing the culture of these entities ( A Mafia Nation State. And a Globalised Vampire Corporate, are both simply entity’s, with bad cultures, so should be viewed in the same light when considering their resolution) and the global rules they play by.

        The West, driven frequently by the left, continuously attempts to deal with any issue. By putting an Ambulance at the bottom of the cliff and using handouts, to attempt to resolve the result of any problem.

        The war on drugs is currently a failure, as the MAJORITY of the focus, (Du 30 in Particular) is still, on the street dealer addict (Demand). Not the producer and trafficker (supply).This week in our country they confiscated US $ 40 MILLION + Worth of Amphetamine (from 1 chinese trafficker) and Street price has not gone up..

        The left dominated democratic West will keep on using a “Handouts” to deal with the results of the problems. Never taking the hard choice, and attempting to deal with the origin root causes. So the Corporates,Drug producer/suppliers, and china, continue to get stronger.

        Corruption and privilege, among a few people and “Banker’s”, are the least of the Wests problems today.

        As they are simply a “symptom” of the “Bad Cultures” of the Globalised Vampire Corporates, currently allied with china. Which is the root problem.

        • Jerry Bear says:

          I hear nothing is harder to change than corporate culture. It is why so many once great corporations slowly commit suicide. Bureaucracies perpetuate themselves by promoting those just like them. Nothing can be allowed to change.

        • d says:

          “I hear nothing is harder to change than corporate culture”

          Should read:

          I hear nothing is harder to change than organisational culture. (corporates are just another Organisation)

          And you heard correctly.

          Take police corruption.

          It is a culture, impossible to eradicate, as there are always some infected apples, left in the barrel. ( unless you take the Himmler Goebbels approach, that it it better to kill ten innocents, than allow 1 criminal to go free( But then you end up with an incomplete skeleton of a force any way))

          The only way is to replace one police force with another. Having a chinese wall between them, at all time’s.

          Possible but very expensive and time-consuming.

          With corporates the simplest way is to buy them up, keeping only the Physical assets. Sometimes a skeleton or highly skilled technical staff, and the Customer bases.

  10. History says:

    Stocks up again and David Stockman keeps repeating “soon” for the crash although his “soon” ended up getting pushed back again and again.

    At this point, the only goal of the stock market is to prove Stockman wrong. LOL.

  11. akiddy111 says:


    I do not mean to be sarcastic or disrespectful, but what is your point ?

    Global stocks, bonds and real estate are very overvalued relative to historical averages. As was the case in 2007, If you do not plan on holding for at least 5 years, it would be wise to sell.

    • History says:

      @akiddy111, global stocks have been overvalued for a LONG time. It could get even more overvalued. Saying that something is going to correct “soon” though is irresponsible. Stockman should put his money where his mouth is. Publish his trading results.

  12. RR worker says:

    Railroad worker here and I can assure you that it’s only going to get worse. The only reason they’ve made it this long is because there are so few railroads left that they’ve pretty much become TBTF. The management is atrocious and they have so many rules that are constantly changing and they nitpick every single thing we do.

    Weekly car counts are down about 15% from where they would normally be and they are cutting jobs, but not saving money because the work still needs to get done so they are paying overtime and running guys into the ground.

    Lower fuel costs hurt them more than they help. It just makes trucking more competitive and most companies don’t want to deal with all the hassle that comes with the railroad when trucking is close to the same cost.

    I already mentioned how bad the management is, but it only gets worse. They don’t follow the Peter Principle of promoting people to their point of failure, but they try to promote failures to the point of competence. Needless to say this isn’t working.

  13. J D Z says:

    I think you hit the nail on the head with stock buybacks. It used to be illegal for corporations to buyback their stock for good reason. There are far reaching unintended consequences not to mention the gutting of corporation for short term gains. SEC should bring back pre-1980’s rule and see how fast the market would revert back to business fundamentals.

    • Jerry Bear says:

      I am afraid that is about as likely to happen as peace suddenly breaking out in the Middle East.

  14. michael Engel says:

    CAPEX to fight Panama canal expansion , while the global trade is
    slowing down.
    CAPEX to expand oil shipping on rail, while extraction of oil & gas
    are falling down and inventory is full, loaded.
    Coal is out of fashion, but solar is a must. Especially when new type of
    “batteries that had been invented & tested successfully.
    California energy inflow look like a blood vessel pipeline.
    Ca. use NATGAS, hydro, solar & wind, import.
    Between 11 AM – $ PM, sunshine. The sun smile, dominate.
    And the blood vessel has a big plaque.
    Solar provide energy for consumption + energy spent on Breckenridge
    ski lift ticket, it elavate water, for potential energy. At night time the dam release water from the dam to activate a turbine.
    Dam can be breached, just like Oroville, Ca. dam, recently.
    Every energy source is suppressed, especially when the sun shine.
    Including the battery portion that suppress consumption from solar.
    All systems , – they are all needed , – operate inefficiently.
    It is costly, a waste of tax payers money, but they hate coal.
    Coal is punished and RR are punished too.
    Coal in a civil war with every source of energy and every body in Ca
    Coal will simply stay in the ground until all it’s opponents will be
    exhausted, bloodied, or out of business.
    It’s just preserve itself for future generations. It will prevail.

    • polecat says:

      “Coal will simply stay in the ground until it’s opponents will be exhausted, bloodied, or out of business.”
      “It’s just preserve itself for future generations. It will prevail.”

      Yes, maybe for the Capital …..
      .. But as for District 12, as well as the other districts, not so much ! The ‘Peacekeepers’ of ‘Versailles-On-The-Potomac’ will see to that ….

    • Wolf Richter says:

      The problem of coal in the US has been for two decades that it cannot compete on PRICE with natural gas (which is dirt cheap) and with the “combined cycle gas turbine,” a technical innovation that became commercial in the mid-1990s. CCGTs now run at about 65% thermal efficiency. The CCGT doesn’t work with coal. Coal power plants use steam turbines that are about 35% efficient.

      Dirt cheap NG firing a CCGT power plant has been replacing coal since the late 1990s. It is for that reason that coal dropped from 55% of the US power mix in 1990 to about 31% now. Last year was the first year that NG produced more power in the US than coal. Power generators invest in technologies where cost are lowest.

      • d says:

        Somebody needs to explain this thing both of us know, to P 45, who is still beating the coal drum long and loud.

        The US coal fields are a backup. The US can go a dig that dirty black S up, any time they really need it.

        Its not going any where.

      • wkevinw says:

        The NG supply due to the fracking technology is truly enormous. It has changed all energy industries and even some chemical industries that use NG and related byproducts as feed materials.

        The planet’s crust is gigantic producer/reactor making natural gas.

        It is a very big deal. Probably a top 10 technology development of the past century.

  15. Willy2 says:

    – I assume that those “share buy backs” are financed by the companies of those same CEOs, like they were with so many other companies. Thereby pushing those companies deeper into debt but there’s a positive side: it increases the profit per share.

    • Willy2 says:

      – So, the question becomes: what happened to the cashflow & the debtload of those companies (e.g. CSX) ?

  16. The Loop Closes says:

    I work for a company where we track industrial spending. I noticed that we we attracted a vast amount of attention from a huge domestic railroad contractor and it makes sense why they are spending the cash now with us. Sounds like there is desperation out there and they are using any means to find work. If things are about to be worse I feel sorry for the salesman.

    • Wolf Richter says:

      I’ve gotten a margin call before. It doesn’t matter who sells, whether it’s you or your broker. It’s simply a sale of a security, for profit or loss, as far as tax treatment is concerned.

  17. Justme says:

    CSX: But…but…but…CSX is a Warren Buffett / Berkshire Hathaway holding. It can’t drop in value. Everybody KNOWS that! Uncle Warren is infallible.


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