Donald Broughton, founder of Broughton Capital and author the Cass Freight Index says the index signals contraction, possibly by the end of the year.
That's just one one month away.
Six Key Points
- With the –5.9% decline in October, following the string of declines in May through September (ranging from -3.0% to -6.0%), we repeat our message from the previous five months: the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.”
- We acknowledge that: all of these negative percentages were against tough comparisons (some extremely tough), and the Cass Shipments Index has gone negative before without being followed by a negative GDP. However, demand is weaker across almost all 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********.**
- 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 go negative by year’s end.
- The weakness in spot market pricing for many transportation services, especially trucking, along with recent airfreight and railroad volume trends, heightens our concerns about the economy. Weakness in commodity prices, and the ongoing decline in interest rates, have all joined the chorus of signals calling for an economic contraction.
- The Index on a 2-year percentage change basis went negative (-0.1%). This suggests that the great surge of 2018, or ‘Trump bump’ as it was characterized by many, has now been completely erased at least from a freight flow perspective, as measured by the volume of freight bills paid by Cass.
- With China, the world’s second largest economy (even though the latest headlines and tweets keep suggesting there will be a resolution). Tariffs have throttled export volumes in many areas of the U.S. economy, most notably agriculture exports and other select raw materials. We maintain hope that there will be a resolution; that there will be a trade deal because both China and the U.S. have to reach one. But the Asian airfreight volumes continue to suggest a growing risk that one or more of the Asian economies (China, South Korea, Singapore) is already sliding into recession. The current civil unrest in Hong Kong only increases the risk of an economic contraction and is consistent with the popular reaction of citizens who are more challenged/not as prosperous as is commonly believed.
- With Mexico. The threat of tariffs, and then the recension, sent shock waves through many supply chains. Border transit times going Northbound and Southbound have gone from less than 30 minutes to more than two days in some cases. Even before the tweets about tariffs, border inspections had become increasingly more stringent. Mexico is our third biggest trading partner, and over 80% of their exports are to the U.S. Disruptions in trade between our countries are harmful to our economy and capable of producing a recession in Mexico. Risk has gotten worse.
- Autos and Housing: Consistent with disappointing housing starts (down -1.3% YTD) and lackluster auto sales (down as much as -4.8% in April and -1.6% YTD), spot pricing in transportation has declined dramatically. Especially in trucking, spot pricing has reached levels below contract that will drive weakness in contract pricing and eliminate, or at least significantly reduce, all capital investment other than maintenance cap ex. This puts further downward pressure on growth in coming periods.
"Airfreight volumes in Europe continue to suggest that the region’s economy continues to cool."
Airfreight volumes in Asia suggest that the region is on the verge of, or is already entering, a recession. As we’ve highlighted before, when trade tariffs slow the rate of growth for our global trading partners, it poses a real threat to the U.S. rate of economic growth."
"The inbound volumes for Shanghai plummeted and then stayed weak. This concerns us since it is the inbound shipment of high value/low density parts and pieces that are assembled into the high-value tech devices that are shipped to the rest of the world. Hence, in markets such as Shanghai, the inbound volumes predict the outbound volumes and the strength of the high-tech manufacturing economy."
Cass Shipments vs GDP
"At first glance, the GDP for the 1st through 3rd quarter seems very inconsistent with overall freight volumes. Using the Cass Shipments Index as a predictive proxy, we did not expect the GDP to be as strong as the reported 3.1% in Q1, or 2.0% in Q2, or even 1.9% in Q3. As we have already explained, dissecting the contributing factors explains much of the disparity, and should point out that freight flows are a leading indicator. It often takes two to three quarters for the trends in freight to become reported economic statistics."
"Based on the trend since the beginning of the year, but especially the data over the last six months, the Cass Shipments Index continues to signal that the economy is beginning to contract and that the GDP could go negative, or at least come close to being negative, in Q4’19 and or Q1’20."
Cass vs Jerome Powell's Bernanke Moment (Just Today)
Jerome Powell may have had his "Bernanke Moment" today in Congress.
Powell told Congress "Day of Reckoning" Far Off and "there’s nothing that’s really booming now that would want to bust."
Uh... What about the stock market?
Powell's testimony today sounds exactly like Bernanke's proclamation to Congress right before the Great Recession, "there is no national housing bubble to bust."
In case you missed it, that is two recession signals today, one from Cass and one from Powell.
Here is a third: Good Reason to Expect Recession: Greenspan Doesn't
Meanwhile, please note, 4th-Quarter GDP Forecasts Off To Weak Start.
Mike "Mish" Shedlock