The July Cass Information Systems Inc. Freight Shipments Index sounded dire warnings for an economic contraction following the eighth consecutive month of negative year-over-year numbers.
“The shipments index has gone from ‘warning of a potential slowdown’ to ‘signaling an economic contraction,’” Cass said in its July report, released on Thursday, August 15.
The index dropped 5.9 percent in July following a 5.3 percent drop in June and a 6.0 percent decline in May.
“We see a growing risk that gross domestic product (GDP) will go negative by year’s end,” the Cass report said. The index has turned negative in the past without being followed by a negative GDP. However, weakness in demand is now being seen across many modes of transportation, both domestically and internationally.
Spot freight market
Weakness in spot market pricing for air cargo, rail and especially trucking “is consistent with the negative Cass Shipments Index and strengthens our concerns about the economy and the risk of ongoing trade policy disputes,” Cass said.
The dramatic decline in spot trucking rates is partially explained by private fleets “clawing back” loads from for-hire companies that raised spot rates 25 percent and contract rates 15 percent in early 2018. So, even though freight is growing slightly, fewer loads are available on the spot market, according to Kenny Vieth, president of ACT Research.
Companies such as Walmart, Target and Toyota that typically used for-hire carriers to cover long haul but handled distribution on their own updated and expanded their fleets in the face of uncontrolled load costs, Vieth said. Now that spot rates have come down, some of those loads may be offered on the spot market.
Lower commodity prices and interest rates further suggest an economic contraction, Cass said.
“The goods side of the economy is still only about one-third of all economic activity,” said Ibrahiim Bayaan, a market expert at FreightWaves. “If there was a recession underway, you’d see it on the goods side of the economy first. But just because you see the goods side struggling, it doesn’t really mean the economy is contracting.”
Cass said the movement of tangible goods is the heartbeat of the economy, and tracking the volume and velocity of those goods has proven to be a reliable predictor of change because adequate forewarning exists. Cass said its index was early in seeing the U.S. economic recovery that began in October 2016.
“More and more data are indicating that this is the beginning of an economic contraction,” Cass said. “If a contraction occurs, then the Index will have been one of the first early indicators once again.”
Bayaan still sees a potential disconnect.
“A similar sort of thing happened in 2015/2016,” he said. “The Cass (Index) and the goods side of the economy started declining, but the economy still grew.”