ST. LOUIS — The Transportation economy continues to signal solid economic growth, perhaps not at the scorching pace attained earlier this year, but still at an above average pace.
That’s the key takeaway from October’s Cass Freight Shipments and Expenditures Indices released Thursday.
“Although we subdivide the economy via multiple other data feeds that represent smaller segments of the freight flows, we continue to see the indices as one of the single strongest proxies for what is happening in the overall U.S. freight markets,” said Donald Broughton, author of the report.
Broughton is founder and managing partner of Broughton Capital, a deep data driven quantimental economic and equity research firm.
The freight markets, or more accurately goods flow, has a well-earned reputation for predictive value without the emotional or anchoring biases that are found in many models which attempt to predict the broader economy, Broughton wrote.
According to the report, despite the strong pre-ship in May and June, inventories across the U.S. economy fell in the second quarter and were a one percentage point headwind to the GDP (the reduction of inventory is a negative to the calculation of GDP, while the increase of inventory is a positive to the calculation of GDP).
Without the drop in inventories that occurred, GDP would have come in at 5.1 percent in the second quarter.
“We should also point out that we are lapping increasingly difficult comparisons, and infrastructure is showing signs of being at our near full capacity in most modes,” Broughton said. “This makes further large percentage increases in volume difficult without significant investments in people, equipment, and technology.”
Despite all the recent turmoil in the financial markets and the resulting concerns about the strength of the economy, the Cass Freight Shipments Index is clearly signaling that the U.S. economy, at least for now, continues to be extraordinarily strong, Broughton said.
“Simply stated, when shipment volume is up 6.2 percent, it is the result of an expanding economy,” Broughton wrote. “We are hard pressed to imagine a scenario, sans a catastrophic geopolitical event, in which such a strong rate of freight flow expansion was possible or even a precursor to an economic contraction. Our confidence in this outlook is emboldened by the knowledge that, 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. Conversely, during the same period, there has never been an economic expansion without there first being an expansion in freight flows.”
The Cass Expenditures Index is signaling continued strong pricing power for those in the marketplace who move freight, Broughton said, adding that demand is exceeding capacity in most modes of transportation by a significant amount.
In turn, pricing power has erupted in those modes to levels that continue to spark overall inflationary concerns in the broader economy.
“With the Expenditures Index up 12 percent, we understand those concerns, but are comforted by two factors: the cost of fuel (and resulting fuel surcharge) is included in the Expenditures Index and the cost of diesel was up 20.9 percent in October; almost all modes of transportation are using the current environment of pricing power to create capacity,” Broughton said. “To the extent that pricing is materially exceeding the marginal cost of creating that capacity, market participants are investing heavily in the exact activities which kill pricing power in commodity markets (i.e., expansion of capacity with the belief that current pricing power will endure for an extended period of time).
“As we explained in previous months, we do not fear long-term inflationary pressure as technology provides multiple ways to ever increase asset utilization and price discovery in all parts of the economy especially in transportation. In fact, we are continuing to see more signs that electronic logging devices, which initially hurt the capacity/utilization of truckers (especially small truckers), are becoming an ever-smaller impediment to capacity utilization. Many of the truckers which were the most adversely effected are now getting most, if not all, of the original loss in utilization back. This is especially true in the dry van and reefer marketplaces of trucking. Even the flatbed segment of trucking, which initially faced the greatest challenges with productivity after the adoption of ELDs, has begun to adapt.”
For more information on the Cass index, visit www.cassinfo.com
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