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Cass Says Data Continues To Point Toward Economic Contraction

FreightWaves

Freight shipments and expenditures declined on a year-over-year basis again in September according to the latest Cass Freight Index Report.

According to the report, shipments declined 3.4% in September, the tenth straight month of year-over-year declines. On a month-over-month comparison, the index improved 0.8% to its best reading since May.

Donald Broughton, founder and managing partner of Broughton Capital and author of the report, said, "the shipments index has gone from warning of a potential slowdown to signaling an economic contraction."

The shipments index first turned negative on a year-over-year basis in December 2018 with the declines accelerating through July (-5.9%). However, the declines have slowed a bit with August (-3%) and September (-3.4%).

Cass Freight Index – Shipments (SONAR: CFIS.USA)

The report called out continued volume weakness is several modes. The European Airfreight Index has continued to see mid-single digit declines, down 8.6% in August as headwinds from Brexit weigh on demand in the region. Further, Broughton said that the preliminary September reading for the APAC Airfreight Index was -9.4%. He said that the volume declines in the region's three largest airports, Hong Kong, Shanghai, and Incheon, led the way with the largest declines.

Declines in rail carloads haven't eased either. The U.S. railroads saw carloads decline 7% year-over-year in September, down 5.6% year-over-year for the third quarter of 2019. The third quarter was the worst yet in 2019 with carloads down 4.2% in the second quarter and 1.8% in the first quarter.

TL has seen a modest volume inflection of late. OTVI.USA, an index based on the volume of accepted tender volumes on a given day, turned positive on a year-over-year basis in late July. However, the mid-single digit increases may be benefitting from easier comparisons as volumes began to really fall off in October 2018. In any event, TL demand appears to be firming, certainly on a relative basis to other modes.

Outbound Tender Volume Index – USA (SONAR: OTVI.USA)

With the continuation of the declines in the shipments index, Broughton said "we see a growing risk that GDP will go negative by year's end."

"The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes. Weakness in commodity prices, and the ongoing decline in interest rates, have all joined the chorus of signals calling for an economic contraction," continued Broughton.

The expenditures index saw a 4.5% year-over-year decline in September, up 0.5% month-over-month. The declines in expenditures started to occur in May (-1%), with a slightly positive reading in June (+0.9%). However, the declines have accelerated since – July (-1.4%), August (-2.6%) and September (-4.5%). September's decline was the largest yet so far in 2019.

Cass Freight Index – Expenditures (SONAR: CFIE)

Further, the Cass Truckload Linehaul Index declined 2% year-over-year in September after a 2.6% decline in August. August was the first year-over-year decline for the index, which measures the change in per mile truckload (TL) linehaul rates excluding fuel and accessorials, in this TL cycle. The index was flat year-over-year in July.

Cass Truckload Linehaul Index (SONAR: CTLI.USA)

The recent declines aren't surprising as spot rates in the TL market topped out at the end of June 2018. As spot pricing dropped from the summer highs of 2018, remaining subdued for the remainder of the year and taking a notable step lower through the first half of 2019, the pressure on TL rates continues. According to the report, "with spot pricing still well below contract, spot pricing should continue to grow as a percentage of the mix, causing realized pricing to continue to decline, staying below 2018 levels."

This was the rationale for several equity analysts to lower their earnings expectations for TL carriers moving forward. Most analysts don't expect the spot market to inflect positively until spring bid season at the earliest.

Broughton cited several reasons why he is growing more concerned with an economic slowdown. He noted "severe declines" in international airfreight demand, continued weakness in railroad carloads (especially in autos and building materials), weakness in spot market pricing (especially in trucking), a loss of momentum in chemical shipments and continued trade disputes as chief concerns of a "global slowdown spreading to the U.S.," which he believes has been confirmed by the recent declines in the Purchasing Managers Index (PMI).

The PMI, a survey of manufacturing supply executives, shows a steady state of decline for the manufacturing sector. September's 47.8 reading was the second consecutive month the index was sub-50, which is considered contraction territory. The index breached this threshold for the first time in more than three years in August and now sits at a low not seen since 2009.

Lastly, Cass' Intermodal Price Index has seen see year-over-year increases moderate as 2019 has progressed, up only 0.1% in September. It appears that excess truck capacity is finally catching up to intermodal pricing, most notably in the East. At an investor conference in early September, representatives with J.B. Hunt Transport Services Inc. (NASDAQ: JBHT) said that lower TL spot market prices are creating the expectation that intermodal pricing could be lower next year. Further, some analysts believe that the intermodal marketing companies have been attempting to gain market share as a means of stemming industry-wide intermodal demand erosion and propping up their asset (container) returns. If so, this likely presents a headwind to intermodal pricing.

Cass Intermodal Price Index (SONAR: CIPI.USA)

The Cass Freight Index represents shipment and expenditure activity across Cass Information Systems' more than $28 billion in annual freight payables on behalf of its clients.

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