The Cass Shipments Index came in negative for the fifth month in a row in April, sparking concern about potential economic contraction.
Boughton Capital Founder and Managing Partner Donald Boughton maintained a positive outlook throughout the last several months of negative shipments, becoming gradually more skeptical as the trend continued. He chalked the first couple months up to touch comparisons, but he was openly cautious by February.
April shipments were down 3.2 percent year-over-year, prompting Boughton to acknowledge “material and growing downside risk to the economic outlook” in the latest Cass Freight Index Report. He pens the report each month.
“We acknowledge that: all of these still relatively small negative percentages are against extremely tough comparisons; the two-year stacked increase was 6.6 percent for April; and the Cass Shipments Index has gone negative before without being followed by a negative GDP,” Boughton said in the report. “We also submit that at a minimum, business expansion plans should be moderated or have contingency plans for economic contraction included.”
Weak spot market pricing in trucking, combined with declining airfreight volumes and a swoon in railroad volumes, increases Boughton’s concerns about the state of the economy and the potential impact of ongoing trade policy issues.
Airfreight volumes in Europe suggested in a cooling economy in April, while airfreight volumes in Asia suggest the region is entering a recession, according to Boughton. He pointed out that, if tariffs slow the rate of growth for U.S. trading partners, the U.S. economy is also at risk.
“The data in coming weeks will indicate whether this is merely a pause in the rate of economic expansion, a retrenchment or the beginning of an economic contraction,” Boughton said. “Evidence is accumulating that this is more than ‘just a pause.’ If a contraction occurs, then the Cass Shipments Index will have been one of the first early indicators once again.”
The Cass Shipments Index was one of the first indicators to turn positive in October 2016, signaling a recovery in the U.S. economy.
The initial estimate from the Bureau of Economic Analysis (BEA) of the first quarter 2019 gross domestic product (GDP) was an increase of 3.2 percent, far better than the Cass Shipments Index or freight volumes would suggest.
Boughton dissected the estimated GDP growth to determine what was causing the incongruence.
“Increases in inventory contributed 0.65 percentage points, while more exports (0.45) and fewer imports (0.58) contributed 1.03 percentage points,” Boughton said in the report. “Not including these adjustments, GDP increased by a mere 1.5 percent.”
“At first glance the GDP for the first quarter seems very inconsistent with overall freight volumes,” Boughton said. “Using the Cass Shipments Index as a predictive proxy, we did not expect the BEA to report 3.2 percent as its initial estimate. As we have already explained, dissecting the estimate explains much of the disparity, but we won’t be surprised if the second estimate and final report include downward revisions.”
Next month’s number could bring more clarity to the current economic situation in the U.S., but for now, Boughton is urging people to anticipate change.