FREIGHTWAVES' SONAR CHART OF THE WEEK (Jan 13 -Jan 19, 2019)
Chart of the Week: Purchasing Managers Index and Cass Freight Shipments Index (SONAR:ISM.PMI, CFIS.USA)
The widely used macroeconomic Purchasing Managers’ Index (PMI) – measure general economic health in the U.S. like GDP -- reported by the Institute of Supply Management (ISM) dropped to a value of 54.10 for November of 2018. Similarly, the Cass Freight Shipments Index dropped 5% to hit its lowest value since January of 2018. Looking at these two seemingly unrelated indices on a SONAR chart reveals they have a loose correlation and are giving us a good indication the economy and freight market have slowed.
The Cass Freight Shipments Index is an index that measures freight volume in the U.S. It is based on the amount of freight invoiced processed. The PMI is based on a series of surveys conducted by the ISM where The Cass measure has aseasonality to it where the PMI does not. The freight market has more exaggerated ebbs and flows than the general economy. As many analysts talk about the possibility of contraction, both indices are telling us we are not quite there yet.
What most economists and analysts can agree on now is that the economy is not expanding as fast as it has been over the past 12 months. Both indices tell us that neither the economy nor the freight market have contracted but are indeed slowing. The interesting piece of this is just how intertwined the two indices are. Removing the seasonal aspect of the Cass index, the two indices almost move in sync with each other save for the early part of the 2009-10 recovery from the recession.
What many carriers and brokers don’t fully understand is the relationship between the general economy and the freight market. They get tunnel vision into their own exposure to the economy based on their customer base. Carriers and brokers tend to have customer groupings within a certain sector of the economy. The largest carriers can only see 1-2% of the entire freight market. The gross majority of the brokers and carriers have less than 0.1% exposure to the entire freight market. This means they are essentially blind to market conditions. Macro-economic indicators like the PMI can illuminate the blind spots.
This does not mean carriers and brokers should ignore their specific exposures based on their customers, but they should be aware that the general economic flow will have implications to every business in the U.S. and should be a part of their evaluative processes.
Knowing that the macro-economic situation can help carriers understand how to properly forecast for the next year and be prepared to adjust their rates accordingly. Right now the PMI and Cass indices are showing us that the market are both softening and bid rates should be handled more conservatively (not at the 6-10% increase levels) than they did in 2018. It is important to note that a slowing economy is not a contracting economy. Both values are still relatively strong, just not as strong as they were in the first three quarters of 2018.
About Indices presented in this article
(SONAR: ISM.PMI) Institute of Supply Management Purchasing Managers Index - The Purchasing Managers Index (PMI) is based on a survey sent to senior executives at over 300 companies. It focuses on five areas: new orders, inventory levels, production, supplier deliveries and employment. A value over 50 indicates economic expansion where and value below 50 indicates contraction.
Cass Freight Index (CFIS.USA) - Shipments - The shipments index is a measure of total freight volume across all modes in the U.S. The index is based on its client base of hundreds of large shippers and over $25 billion in freight transactions.
(About Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week the Sultan of SONAR will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
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