Cass Information Systems, in its recently released Cass Shipments Index, based on data from the second quarter of 2019, makes a bold assertion: that United States gross domestic product may be negative, or come close to being negative, in the current third quarter. Continued weakness at current levels in the index, the report goes on to say, “should result in a negative Q4 GDP”— signaling the beginning of a recession if followed by a second negative quarter.
The assumption behind these projections is that movements in the levels of freight shipments are an indicator of broader economic activity, so that dips in cargo volumes signal an economic downturn. Cass describes this leap of faith as follows: “We place our trust in the simple notion that the movement of tangible goods is the heartbeat of the economy, and that tracking the volume and velocity of those goods has proven to be one of the most reliable methods of predicting change.”
It’s indubitable that the Cass Shipments Index has gone negative before without being followed by negative GDP. But Cass is confident in its assertions this time around because “weakness in demand is now being seen across many modes of transportation, both domestically and internationally.”
The Cass analysts are concerned about severe declines in international airfreight volumes and cratering railroad volumes, especially for auto and building materials. Volumes of chemical shipments have also lost momentum.
Weakness in commodity prices—such as the 43% drop in crude oil prices between October and December of 2018—and the decline in interest rates represent additional indications of an economic contraction. So are the drop in automobile sales—both in the U.S. and China—and the decline in housing starts here at home.
Cass sees the weakness in spot pricing for transportation services, especially trucking, as consistent with and a confirmation of the negative trend in the Cass Shipments Index. (But the Coyote Curve is indicating an upward trend for U.S. truckload prices, beginning as early as the fourth quarter. (See main story on page 14.)
The continued imposition of trade tariffs and retaliatory tariffs, and the possibility that the U.S.-China trade dispute is reaching a point of no return, is perhaps most worrisome for Cass. The threat of tariffs on Mexican goods also sent shock waves through many supply chains.
“Tariffs have throttled export volumes in many areas of the U.S. economy,” the report said, “most notably agriculture exports and other select raw materials.”
The report dismisses data which showed moderate to strong U.S. economic growth in the first half of the year. Cass attributes the official 3.1-percent increase in first-quarter GDP to increases in inventory and an increase in exports combined with fewer imports. Without those data, which Cass contended “are no longer relevant in our modern economy,” GDP increased by only 1.8 percent.
As far as the reported second-quarter rate of 2.1%, stimulative government expenditures drove 0.85 percentage points of the increase, according to Cass.
“The more unrestricted and robust global trade is, the more prosperous the global population becomes,” the report concluded. “Protectionism, like so many government regulations and programs, frequently produces results that are the exact opposite of the intended outcome.”
