April Cass report points to emerging U.S. economic slowdown

Numbers issued in the most recent edition of the Cass Freight Index Report from Cass Information Systems appear to be in lockstep with signs and themes related to an economic slowdown in the United States. 

Many freight transportation and logistics executives and analysts consider the Cass Freight Index to be the most accurate barometer of freight volumes and market conditions, with many analysts noting that the Cass Freight Index sometimes leads the American Trucking Associations (ATA) tonnage index at turning points, which lends to the value of the Cass Freight Index.

Shipments in April saw a modest 0.6 percent increase to 1.077 compared to March, down from the 1.8 percent increase seen from February to March and the 8.3 percent jump from January to February. And on an annual basis, April shipments are down 4.9 percent.

While April shipments were up compared to March, Cass pointed out shipments are rising at a much lower rate than earlier in 2016, as the data indicates, explaining “the slowdown mirrors the slowdown in the economy.”

On a year-to-date basis, Cass said shipment growth is a departure from more robust growth that was evident for the same period going back to 2011. Contributing to the declines was a 21.1 percent decline in railroad shipments in April, following a 22.2 percent increase in March, with April intermodal shipments down 17.8 percent off of a March gain of 19.2 percent. Other contributors were declines in truck tonnage from the American Trucking Associations and a modest decline in April manufacturing output issued by the Institute of Supply Management.

On the expenditures side, Cass reported that at 2.292 expenditures were up 0.2 percent compared to March and down 8.3 percent annually. Cass explained that the 0.2 percent expenditures gain in tandem with the 0.6 percent shipments’ increase points to a “very soft” rate environment, and with excess capacity prevalent across all freight transportation modes competition for loads is holding rates down. 

In assessing the over all economic outlook, Rosalyn Wilson, founder and president of FreightMatters, and author of the report, explained that the slowdown in the U.S. economy over the first fourth months of 2016 is directly related to many variables, including: the continued decline of the global economy; the reticence of the consumer sector to increase its buying; the loss of jobs and income from the plunging oil costs (which shut down the fracking business and cut back on coal shipments); very high inventory levels across the entire supply chain; and poor export figures due to both the strength of the U.S. dollar and a decline in worldwide demand.

“Eyes are on the Chinese economy, which has been extremely unstable and can have a big effect on world economies if it continues to falter,” Wilson wrote. “Based on the trends of many economic indicators, it appears the economy may get worse before it gets better.”

The takeaways of this report continue mirror heightened awareness, especially in recent weeks, over the economy. As previously reported, the not so steady nature of the economy as it relates to freight has been front and center for a while now, with some industry stakeholders positing positive change is right around the corner while others are clear in saying the situation is far more dire.

And there are concerns that the current economic landscape, related to freight in this case, be on the verge of the “R” word, as in another freight recession, something which has not truly happened in earnest going back to the dark days of 2009.

A research note from Stifel analyst David Ross highlighted that the current economic environment at the moment feels similar, but not the same to the last freight recession.

Ross explained that was evident in a mostly sour first quarter earnings season for transport companies his firm covers, calling earnings season unequivocally disappointing, as freight volumes continue to be hampered by elevated inventory levels.

Depending on where things go from here, Ross outlined bull and bear scenarios for the freight economy with former calling for the U.S. continuing a long, below-trend, uninspiring economic recovery with eventual supply shortages in trucking driving rates and margins higher. As for the latter, he said the U.S. could enter into a recession, pushing freight volumes even lower and supply shortages fail to materialize.

“After a freight recession (we went into one last year and hope to emerge soon), the next recession should not be limited to just the transports but will almost certainly be much broader,” Ross wrote. We just believe these stocks have another run up in them before likely going lower again in 2017-2018, even if we view that run as limited (don’t expect a return to 2014 levels for most) and it becomes closer to picking up pennies in front of a steam roller with the Fed trying to kick the eventual rate hikes as far down the road as they can, while the S&P 500 still flirts with record highs. In our opinion, future outperformance is contingent on further economic growth this year and an end to the inventory de-stock underway sooner rather than later.”