Economic Uncertainty Looms Large for US Railroads in 2025
As the Association of American Railroads (AAR) releases its annual Rail Industry Outlook, one word stands out: uncertainty. The report highlights a slew of economic and policy issues that will weigh heavily on the industry in 2025. Rand Ghayad, AAR chief economist and senior vice president of policy and economics, notes that potential shifts in fiscal policy, trade, immigration, taxation, and regulatory frameworks will contribute to heightened economic uncertainty.
A Complex Interplay of Policies
The interplay between these policies will be critical in determining whether the labor market remains resilient enough to sustain consumer spending and support continued rail intermodal growth. The trajectory of the manufacturing sector, which has faced two years of persistent weakness, will also depend on how broader economic conditions evolve in response to both fiscal and monetary measures.
Railroads Post Strong Finish to 2024
Despite the uncertainty, railroads finished 2024 on a strong note. Intermodal volume saw its third-highest year ever, capped by record December traffic. Declining coal shipments continued to drag down carloads, but excluding coal, carloads were narrowly up in December from the same month in 2023. The AAR’s Freight Rail Index (FRI) measuring seasonally adjusted intermodal volumes plus carloads excluding coal and grain in December rose 2.2% from the previous month, to its highest point since January 2021.
Consumer Spending Remains Robust
Consumer spending, a pivotal support for intermodal, remains robustly strong on an equally solid labor market. Adjusted for inflation, spending was 2.9% higher than in November 2023, while spending on goods increased by 3.4% — its biggest gain in a year. Containers accounted for a record 96.3% of U.S. intermodal originations in 2024, on concurrent double-digit gains in port volumes, particularly on the West Coast.
Labor Market Headwinds
While the labor market continues to exceed expectations, offering optimism that consumer spending and rail intermodal activity will remain supported, there are some labor headwinds. The rate of workers who voluntarily quit their jobs for better opportunities fell from 2.1% in October to 1.9% in November, matching its lowest level since May 2020. Initial unemployment claims edged higher in December, while it took job seekers longer to find a job than a year or two ago.
Inflationary Risks Remain
The year-on-year rate of decline in key inflation indexes such as the Consumer Price Index and the Federal Reserve’s favored Personal Consumption Expenditures index moderated through the end of 2024, indicating inflationary risks remain. The Fed’s rate cuts in September, November, and December aimed to stabilize the jobs market and find a “neutral” interest rate amenable to sustainable growth, moderate inflation, and low unemployment.
Manufacturing Weakness Persists
The decline in U.S. manufacturing over the past two years has weighed on carload traffic, and while business confidence is higher ahead of 2025, uncertainties remain. In 2024, coal shipments fell 13.6% from a year ago to 2.94 million, lowest on record but still accounting for more than a quarter of all carloads. Excluding coal, U.S. carloads increased 1.9% in December, the 11th straight y/y gain.
Railroads Prepare for Uncertainty
As the industry looks ahead to 2025, railroads are prepared to help their customers and the economy continue to grow. Recent surveys from the National Association of Manufacturers and the Business Roundtable suggest that business confidence rose in the fourth quarter of 2024 in anticipation of 2025. While the future is uncertain, one thing is clear: railroads will play a critical role in shaping the economy’s trajectory in the months ahead.
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