We wrote about the Cass Freight Index last year and today we have an update on this data point. By way of re-introduction, this index comes from Cass Information Systems, a payment systems provider to the US freight industry. The company has a wide range of customers, so its findings – based on real-world data – are a reasonable proxy for the industry’s current volume and revenue levels.
Here is the latest Cass Freight Index shipments data on a year-over-year percent change basis in the time series going back to 1991:
And here’s what’s going on at present:
#1: The latest comp looks pretty awful, down 7.9%. The last time it was this bad was November 2009, and even then it was clearly climbing back to flat.
#2: Cass’ commentary about this reading mentioned the following:
- Some of the company’s contacts cited Christmas and New Year’s falling mid-week as a source of December’s weakness.
- From the company’s commentary: “the freight market is weak, largely due to higher inventories and contraction in the manufacturing economy.”
- Also from their report: “… while we expect comps to ease and volumes to flatten out, we are not forecasting much growth in terms of freight volumes in 2020. The US industrial economy – rebound or no rebound – will likely be the biggest swing factor. And the tariff relief from the Phase 1 deal seems to be just that – a relief for some, but not a stimulus.”
That all looks pretty bad, but history clearly shows that the Cass Freight Index can go negative without signaling either a recession or a looming drop in stock prices.
- From mid 1995 to early 1996 it was negative for almost an entire year (two small up readings) and printed a -6.7% comp in November 1995. There was no recession until years later, and the S&P 500 rose by 37% in 1995 and 23% in 1996.
- In September 1998 and February 1999 the index fell by 16.3% and 14.0% (respectively) on a year-over-year basis – much worse than December 2019’s reading. Recession would eventually come in Q2 2001, but the S&P 500 rallied by 28% in 1998 and 21% in 1999.
- The Cass Freight Index also showed negative comps throughout the first half of 2007 (-1% to -7%). Yes, that is pretty close to the 2008 recession, but the index gave a false “all clear” signal in Q4 2007 (+5-6%). In the meantime, the S&P 500 was up 6% in 2007.
- More recently, the index showed negative contraction in freight shipments from March 2015 all the way to September 2016 (-1% to -6%). No recession followed, but equity returns were sluggish in 2015 (+1%) before returning to form in 2016 (+12%).
- Finally, Cass Freight readings were negative throughout 2019. The market knew that would happen given Fed over-tightening in 2018 and trade war concerns. That’s why the S&P 500 fell by 10% in Q4 2018. But in 2019, through all those negative shipping comps, the S&P 500 rose by 31.2%.
The upshot here is that freight shipments get choppy in the middle-later parts of every US economic expansion, and negative readings are common enough. That does not mean a recession is nigh or that US equities will necessarily decline. While the Cass Freight Index is a valuable tool for assessing the US economy, it is neither a reliable early warning signal for recession nor a useful market-timing tool.
Cass Freight Index report: https://www.cassinfo.com/freight-audit-payment/cass-transportation-indexes/december-2019