Like all
professional investors, Warren Buffett pays attention to the larger economy and
is always looking for clues regarding future economic activity. These clues are
known as “leading indicators” and, as it turns out, Buffett’s favorite leading
indicator is freight. Specifically, Buffett loves rail freight.
According to Robert
P. Miles, author of several books
on Warren Buffett’s methods and career, including Warren
Buffett Wealth: Principles and Practical Methods Used by the World's Greatest
Investor; Warren Buffett is an ardent follower of a railroad industry
freight index.
The American
Association of Railroads (AAR) publishes the index titled Average Weekly U.S.
Rail Carloads: All Commodities, among others. But, this one is particularly
interesting to Buffett. It overlays the current year with the prior three years of weekly activity in addition to
showing a trend line for a recent peak year. It provides a quick, aggregate
snapshot of the movement of rail freight within the supply chain. This freight
represents some of the most fundamental raw materials near the top of any
supply chain. To the extent that movement of these raw materials is increasing,
one can infer that general economic activity may also be increasing.
So, how is the
index doing in 2012? Per the April 2012 numbers, the index is now down for
three consecutive months when compared with the same period of 2011.
Fortunately, that is not the end of the story. The unusually warm winter has
decreased the shipments of coal and a drop in U.S. grain exports has decreased
the rail volume relative to grain. When we adjust for these anomalies related to
coal and grain, the AAR tells us that rail shipment activity in the U.S. was
actually 6.7% higher in April 2012 as compared with the same month in 2011.
Freight matters not
just to those of us in logistics and supply chain management, but also to the
Oracle of Omaha.
The complete AAR
report can be found here: Rail
Time Indicators: A Review of Key Economic Trends Shaping Demand for Rail Transportation