Cass Freight Index report points to October shipment and expenditures declines

The most recent edition of the Cass Freight Index Report issued this week by Cass Information Systems pointed to another month of annual freight transportation shipment and expenditure declines in October.

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.

October shipments, at 1.152, were down 3.9% compared to September and down 5.9% annually, marking the 11th consecutive month of annual shipment declines.

Shipments initially turned negative in December 2018 for the first time in 24 months, when it fell 0.8%. January and February were down 0.3% and 2.1%, respectively. As previously reported, the December and January shipment readings were up against respective all-time highs reached in December 2017 and January 2018, coupled with stabilizing patterns in nearly all underlying freight flows.  

The report noted that with the 5.9% October decline coming on the heels of declines from May through September, ranging from -3% to -6%, it is clear that “the shipments index has gone from ‘warning of a potential shutdown’ to signaling an economic contraction.”

The report’s author Donald Broughton, principal of Broughton Capital, wrote that all of these negative percentages are against extremely tough comparisons, and the Cass Shipments Index has gone negative before without being followed by a negative GDP, while adding that weakness in demand is being seen across most modes of transportation, both domestically and internationally.

“Several key modes, and key segments of modes, are suffering material increases in the rates of decline, signaling the contraction is getting worse,” he wrote. “We know that freight flows are a leading indicator, so by definition there is a lag between what they are predicting and when the outcome is reported. Nevertheless, we see a growing risk that GDP will grow negative by year’s end.”

Broughton added that 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 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,” he wrote.

October expenditures, at 2.800, dropped 1.9% compared to September and were down 4.1% annually.

“The Cass Freight Expenditures Index (measuring the total amount spent on freight) was signaling continued, overall pricing power for those in the marketplace who move freight,” wrote Broughton. “With demand no longer exceeding capacity in most modes of transportation for several months, it is not surprising that realized pricing power has gone negative. Unfortunately, the weakness in spot market pricing (especially in trucking) and the decline in fuel prices suggest that realized pricing will be under increasing amounts of pressure and is at risk of staying negative through the first half of 2020.”

He also observed that concerns regarding inflation are being replaced by concerns about contract pricing and cancellation of transportation equipment orders, with four key factors playing a role, including:

1-Almost all modes of transportation used their pricing power to create capacity, which first dampened and has now killed pricing power;

2-Spot pricing (not including fuel surcharge) in all three modes of truckload freight (dry van, reefer, and flatbed) has been falling for 15 months. Spot pricing, using dry van rates as a proxy, fell dramatically from its peak in June 2018 (more than $0.50 a mile) to at one point in May falling to more than 30.0%below contract pricing (a level Cass declared unsustainable). The highly discounted pricing available in the spot market has attracted an increased amount of demand, which has deteriorated pricing in the contract market (which is down $0.21 a mile or -9.7% in the last 15 months), and has begun to close the gap between contract and spot;

3-The cost of fuel (and resulting fuel surcharge) is included in the Cass Expenditures Index. Since the cost of diesel has been negative over the last 5 months on a YoY basis (down -5.4% June, down -5.8% in July, down -6.6% in August, down -7.9% in September, and down 9.3% in October), it is increasing the negative amount of pricing reported; and

4-Whether driven by capacity addition/creation or lower fuel surcharges (or a combination of both, which is our best guess) the Expenditures Index has continued to decline: the October 2019 Index is down -6.4% from its peak in September 2018