Cass Freight Index: Economic Outlook

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Cass Freight Index: Economic Outlook

The Cass Freight Index has become something of a go-to measure for bearishly inclined economic commentators, so let’s talk about it. First, a summary of what the index measures:

  • Cass Information Systems is a large provider of freight audit and payment services based in St. Louis. They also serve the telecom, mobility, cloud, and waste industries.
  • Started in 1995, the Cass Freight Index measures both volumes and expenditures. The company uses data derived from $28 billion of domestic freight modes across all major industry verticals and from a wide array of shipping companies, large and small.
  • Cass performs all the adjustments you’d expect, correcting for workdays in a month and the inevitable additions/deletions as individual companies come into/go out of the dataset.

As for why this index is causing so much hand wringing, here is a brief summary of their latest report:

  • “With the -3.4% drop in September, following the -3.0% in August, -5.9% drop in July, -5.3% drop in June, and the 6.0% drop in May, we repeat our message from the previous four months: the shipments index has gone from ‘warning of a potential slowdown’ to ‘signaling an economic contraction’.”
  • More pointedly: “we see a growing risk that GDP will go negative by year’s end”.
  • Finally: “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.”

So… pretty dire stuff, but what is the history of the Cass Freight Index in actually predicting a US recession?

Here is a chart with the year-on-year percentage changes back to 2000:

Three things pop out to us from this chart:

  • The Cass Freight Index is, as one would expect, quite cyclical. The peaks occur early (2010) to mid cycle (2004). Recessions (the gray bars) see lower levels commensurate with the size of the contraction (worse in 2009 than 2001).
  • But things get very choppy later in a cycle. The fast slide from +14% in September 2000 to -12% comps in December was an excellent signal something was amiss. But the 2005 – 2008 experience, where the index bounced between +9% (June 2006) and -9% (January 2007) was not as clear a harbinger of the 2008-2009 recession. And that was a big one, of course.
  • More recently, the index has been noisier than usual. For example, the Cass Freight Index was negative every month from March 2015 to September 2016. It then bounced strongly in the first half of 2018. Some of this was likely due to inventory stocking ahead of tariffs, and the comps have been hard ever since.

Our bottom line: yes, the Cass Freight Index, well constructed and with a long time series, is something to watch but as a robust indicator of impending recession its track record is mixed. We will keep tabs on it in coming months because the comparisons get much easier in November (0.6% growth last year), December (-0.8% last year) and Q1 2020 (average of -1.1% in Q1 2019). Barring an exogenous shock, this indicator should begin to look better soon.

Sources:

Cass Freight Index: https://www.cassinfo.com/freight-audit-payment/cass-transportation-indexes/cass-freight-index

St. Louis Fed FRED Database: https://fred.stlouisfed.org/series/FRGSHPUSM649NCIS#0