The Cass Freight Index fell to its lowest level for 2019 in the month of December, with the shipments component of the index falling 7.9% and the expenditures component declining 6.2% year-over-year.
“It wasn’t the prettiest month for the Cass Index, which means it wasn’t the best month in the freight world. Both the shipments and expenditures components of the Cass Freight Index marked their lowest reading of 2019 and took another step backwards in terms of [year-over-year] growth,” commented the author of the report, Stifel Financial’s (NYSE: SF) equity research analyst David Ross.
The shipments component of the index extended its round trip of year-over-year declines, first turning negative in December 2018. Further, shipment declines occurred at their steepest rate since the Great Recession in 2008-09 during December. Ross said that some of the “industry participants” he has talked with noted that even though December had the same number of operating days versus 2018, the midweek holidays resulted in “soft volume and low productivity the last week or so.”
The report attributed the general softness in freight demand to higher inventories and continued weakness in the manufacturing economy as seen in the recent Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) as well as rail carloads.
The PMI, a survey of manufacturing supply executives, provided another reading in contraction territory for December at 47.2%, the lowest reading since 2009. A sub-50% reading implies contraction in the U.S. manufacturing sector.
Ross described the potential for a rebound in the index in January as “doubtful” as both the shipments and expenditures components follow seasonal trends, typically declining sequentially from December to January. With the December readings for both shipments and expenditures already below January 2018 levels, the likelihood for another round of year-over-year declines in January is high.
In fact, if the shipments component sees a sequential decline in January that is in line with the average over the last three years, the year-over-year decline for January would be in the 10% range.
Ross believes that the best chance for year-over-year growth in the index is in the second quarter, “if traditional seasonal freight patterns hold.” The second quarter of 2019 lacked the normal seasonal uptick in activity, providing the pathway for an easier comparison.
However, Ross cautioned that he isn’t predicting much volume growth in 2020 even as the year-over-year comparisons ease. He believes that volumes will “flatten out,” noting that changes up or down in the industrial economy will likely be the “biggest swing factor.”
He also believes that the 6.2% decline in the expenditures component had more to do with the timing of freight spending in 2018 versus 2019. He said that freight spending in the November-December holiday period was higher in December than November in 2018, with the opposite occurring in 2019, creating the difficult December 2019 comparison.
All in, Ross said that “industry pricing was generally higher than year-ago levels” in December 2019.
The Cass Freight Index is a mix of all freight modes, with truckload (TL) counting for more than 50% of the index. Ross said that the relative outperformance of expenditures compared to volumes is the result of “better pricing power” in other modes like rail, intermodal, parcel and less-than-truckload.
Ross said that the expectation is for growth in transport pricing to “moderate in 2020 but remain inflationary,” with freight expenditures “modestly” outpacing a flat volume environment.
In December, Cass’ Truckload Linehaul Index was 3.3% lower year-over-year. Ross said that the expectation for TL pricing will hinge on capacity. He made reference to regulations like the electronic logging device (ELD) conversion and the Drug & Alcohol Clearinghouse along with increases in insurance costs as the key catalysts facing truck capacity.
“Conventional wisdom presently appears to be that supply and demand will find equilibrium around midyear, and spot rates will resume their premium to contract rates and give contract rates room to rise again in 2021,” said Ross.
Lastly, the Cass Intermodal Price Index was up 0.7% year-over-year in December.
The data used in the Cass indexes is derived from freight bills paid by Cass Information Systems, a provider of payment management solutions, which processes more than $28 billion in freight payables on behalf of its clients annually.