This Week’s Message: The Jury’s Still Out, But…

Just finished a long meeting with a good friend and client of, believe it or not, 32 years. I know, you’re now thinking that I was like 7 years old when I started my career 😎. I have had the sincere pleasure, and honor, of working with my friend through the absolute litany of ups, downs, booms, busts, etc., over the past 3+ decades; an era when the market delivered just about anything one might imagine the market could, including the Greatest Recession Since the Great Depression.

After poring through a number of the data points in our proprietary macro index, talking politics, trade wars, the health and optimism of the U.S. consumer, and the sheer pessimism of the U.S. CEO, we agreed that the jury is still out on whether or not the next recession/bear market is just around the corner, or whether what we’re presently experiencing (in the data) will prove to be just a rough patch that will ultimately resolve into yet another leg higher in this longest-ever expansion/bull market. We also agreed that it’s a very good idea to remain hedged while the jury deliberates.

Speaking of “what we’re presently experiencing (in the data)”, soon after the meeting I nestled in to read this week’s release of the Cass Freight Index Report for October. I’ve referenced this monthly report herein before, because, simply put,

“….since the end of World War II (the period for which we have reliable data) there has never been an economic contraction without there first being a contraction in freight flows.”

and it’s the premier analysis on the topic! 

Well, while the latest from Cass’s chief economist won’t suffice as the final verdict, from his perspective it’s not looking so good for the defendant (the U.S. economy).

While the report is quite robust, and objectively considers the causes of various discovered weaknesses, its opening bullet points pretty much sum it up:   emphasis mine…

Continued deterioration in the Cass Freight Shipments Index concerns us:

• 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.

The report also supplied three additions to my “Charts That Trouble Me” file. 

click each to enlarge…

Consumer-related freight data paint a negative picture:

LA and Long Beach Ports activity point to slower retail sales to come:

Overall freight shipments predict a weak economy going forward:

As for the rest of the economy, the PWA Macro Index continues to bounce around the zero line (below zero denotes heightened recession risk):

Again, despite the, to put it mildly, less-than-rosy latest freight data, we’re simply not in recession at this point. I know, you economically-tutored pessimists out there are thinking, “but Marty, recessions are only officially known in retrospect.” 

Okay, I get that, but I’ll go on record as predicting that when the next recession becomes official, it won’t encompass the fourth quarter of 2019. Although, unless animal spirits (in the corporate space) don’t return relatively soon, I fear that the next contraction, and, alas, bear market in stocks, will indeed arrive relatively soon.

We’ll keep you posted.

Have a great weekend!


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