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Slowing economy, trade wars, drag on US rail companies

OMAHA, Neb. – The slowing economy and ongoing trade disputes are dragging railroad profits down in the second half of the year.

Two railroads, Union Pacific and CSX, have reported declining profit and revenue this week as they hauled less grain, imported goods and other products.

Union Pacific's freight volume slid 8% in the quarter.

Kansas City Southern reports quarterly results Friday and Norfolk Southern reports next week.

"It feels to me like the industrial economy is weakening. I don't think it's negative just yet," Union Pacific CEO Lance Fritz said.

That weakening is playing out across the industry with deteriorating shipping volumes implying a pullback by U.S. companies.

The Association of American Railroads reported this Wednesday that in the first 41 weeks of this year, overall freight volume has declined 4%.

North American rail volume last week that includes 12 U.S., Canadian and Mexican railroads, fell 7.6%.

In its most recent quarter, Union Pacific earned $1.56 billion net income, or $2.22 per share. That's 7 cents short of what industry analysts had expected, according to a survey by Zacks Investment Research. Profit fell 2% compared with the same period last year.

Edward Jones analyst Jeff Windau said the economy and railroad profits should improve if the trade dispute with China is resolved sometime in the next year or two, but there are no definitive signs the two sides are moving closer to an agreement now.

China appealed to Washington for a quick end to their trade war but gave no indication Thursday what additional steps Beijing might want before carrying out what President Donald Trump says is a promise to buy up to $50 billion of American farm goods.

Tariff hikes by both sides on billions of dollars of imports have battered factories and farmers, weighing on global economic growth. Trump delayed a tariff due to take effect Tuesday on $250 billion of Chinese goods but another increase on $160 billion of imports still is scheduled for Dec. 15.

The dispute has already led to notable declines in exports, including American agricultural goods.

China bought 20 million tons of U.S. soybeans this year, according to the country's foreign ministry spokesman, Geng Shuang. China imported about 33 million tons of American soybeans annually before the tariff fight and collapsed to 16.6 million tons last year.

On Thursday, Union Pacific said that over the past three months, agricultural shipments fell 2%. Shipments of containers of goods fell 11% as the economy slowed and trade disputes curbed imports.

"The best thing for us to do as an economy, as a nation, is get some of this trade overhang behind us," Fritz said.

Union Pacific Corp., based in Omaha, Nebraska, said it expects similar overall volume declines in the final quarter of the year

Weak coal demand also hurt railroad results as more utilities move away from using the fuel. Union Pacific coal shipments fell 17% in the quarter.

Overall revenue fell 7% to $5.52 billion, also short of the $5.62 billion analysts expected.

Union Pacific controlled costs well, said Citi analyst Christian Wetherbee, but not enough to offset deteriorating freight volumes.

The railroad cut its expenses by 10% to $3.28 billion in the quarter. Union Pacific has been working to streamline its operations by running trains on a tighter schedule, so it can use fewer locomotives, cars and employees to move the same freight.

The company operates 32,400 miles of track in 23 Western states.

Shares of Union Pacific gained 1% in afternoon trading.

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