January brings accelerated declines for Cass freight volumes and expenditures

unidentified tractor-trailer on highway with snowy mountains in backdrop

The Cass Freight Index fell again in January, reporting the highest year-over-year declines of this freight cycle.

The shipments component of the index fell 9.4% year-over-year, the biggest one-month decline since October 2009. The expenditures component was off 8% year-over-year in January.

Cass Freight Index (Shipments) – SONAR: CFIS.USA

From the report, “The turn of the calendar didn’t leave the bad news in 2019, as the Cass Freight Index showed continued weakness in the U.S. freight market. Both the shipments and expenditures components of the Cass Freight Index worsened sequentially and showed decelerating y/y growth,” commented Stifel Financial’s (NYSE: SF) equity research analyst and author of the report David Ross.

However, Ross still holds onto the hope of a recovery in the second quarter of 2020.

“As stated last month, we expect 2Q20 to have the best chance of showing actual y/y growth in domestic U.S. shipments and freight costs, if traditional seasonal freight patterns hold, because 2Q19 was below average in terms of the seasonal surge in activity,” Ross stated.

Additionally, he believes that the potential negative impact from the coronavirus on supply chains could provide increased import activity in the second quarter once China’s export activity resumes.

Cass reported that shipments saw their lowest absolute index reading in three years during January. Ross noted that the weakness was in part due to elevated inventories, which he believes may be returning to normal levels. However, he was quick to point out that new orders remain soft.

“Depending on the severity of the Chinese plant shutdowns and trade volumes, we may see inventories dip significantly over the next couple of months — potentially requiring a period of restocking. So, when exports do begin to grow again, watch the airfreight market for the first signs of the demand rebound, as retailers and manufacturers need to play catch-up,” Ross stated.

While the declines in expenditures, also a proxy for transportation pricing, accelerated in January, Ross said that “industry pricing was generally still a little higher than year-ago levels,” but noted that contractual pricing “remains under pressure” so far in the 2020 bid cycle.

Cass Freight Index (Expenditures) – SONAR: CFIE.USA

Truckload (TL), which accounts for more than 50% of the index’s freight mix, is likely seeing worse trends in expenditures, as the report made reference to relative “pricing power” in other modes like rail, parcel and less-than-truckload (LTL).

Cass’ TL Linehaul Index also saw year-over-year declines accelerate in the month, logging a 6.3% decline. The report stated that the “truckload linehaul index [is] looking more like 2009.”

Cass Truckload Linehaul Index – SONAR: CTLI.USA

While TL capacity tightened around the holidays, it quickly loosened again in January and into February. After climbing to close the year, the Outbound Tender Reject Index remains under 2019 levels. Lower rejection rates imply carriers are more willing to accept the loads tendered to them by shippers under contract terms, which is indicative of excess truck capacity in the market. Recent readings suggest that capacity is still too loose to push spot rates meaningfully higher in the immediate near term.

Outbound Tender Reject Index (USA) – SONAR: OTRI.USA

Ross referenced recent commentary from industry executives at the Stifel Transportation & Logistics Conference last week, which suggested that regulatory changes and rising insurance costs should provide a catalyst to bring capacity and demand closer to equilibrium by mid-2020.

In the report, Ross maintained his forecast for increasing rates during the year: “We expect transport pricing growth to moderate in 2020 but remain inflationary.” However, he noted a strong correlation between the linehaul index and reported metrics from the publicly traded TL carriers, which he believes bodes poorly.

“The fact that January is off to a poor start signals another disappointing quarter ahead for both pricing and volumes at the publicly traded truckload companies,” Ross said.

Lastly, the Cass Intermodal Price Index turned negative for the first time since September, down 2.5% year-over-year in January. Ross pointed to easier year-over-year intermodal volume comparisons in 2020 but believes that rates won’t move higher until TL rates do so.

Cass Intermodal Price Index – SONAR: CIPI.USA

The data used in the Cass indexes is derived from freight bills paid by Cass Information Systems Inc. (NASDAQ: CASS) , a provider of payment management solutions, which processes more than $28 billion in freight payables on behalf of its clients annually.