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Freight's Perspective and Asset Purchases - July 16, 2019

Potential Realized

 Back in April, we wrote how the Cass Freight Index Report showed some potential weakness in the transportation sector and concluded that the shipment index was indicating businesses should be ready to “change tack”. This month, the “potential for contraction” that the report discussed has been realized. Due to “continued deterioration in the Cass Freight Shipment Index”, Cass argues that freight is “signaling an economic contraction”. This comes with several caveats. First, the YoY metrics are based on “extremely tough comparisons”. Second, in the past the Shipment Index has gone negative “without being followed by a negative GDP”. Those disclaimers aside, the data is broadly negative enough to inspire Cass to ask, “Has economic contraction already begun?”.

Beyond just the continuing negative YoY growth in shipments, Cass is:

  • Concerned about declines in international airfreight volumes, particularly in Asia where there is a risk that some economies are “already sliding into recession”

  • Worried about the “swoon in railroad volumes, especially in auto and building materials”, which are “consistent with disappointing housing starts... and lackluster auto sales”

  • Seeing weakness in spot markets confirm the “negative trend” in shipping, where pricing drops have been abrupt enough that “concerns about inflation are being replaced by concerns about contract pricing and cancellation of transportation equipment orders”

  • Troubled by the loss of momentum in chemical shipments, which is “one of the best predictive indicators of U.S. domestic industrial activity”

  • Increasingly concerned that the global slowdown is spreading to the U.S. and that trade disputes are reaching an economic “point of no return”

 Unconventional Measures

 While less alarming than Cass’s diagnosis, Jerome Powell warned in a speech today that while the Fed’s baseline outlook is for growth to “remain solid”, “uncertainties about this outlook have increased”. What’s more, the increasing interconnectedness of global economies requires policy makers to “incorporate” global conditions and expectations “into our policy decisionmaking [sic]”. Along with the increasing interdependence of global economies, central bankers now have additional “tools to bolster our economies and meet our inflation and employment mandates”. So no worries? Not quite. Adding to the list of voices arguing that the central banks are off base is James Hamilton from UC San Diego. In a 2018 Brookings Paper on the various QE programs, he asks “What did these large-scale asset purchases (LSAP) accomplish?” Analyzing both changes in yields and changes in forecasts around various Fed announcements and actions, Hamilton concludes that regarding LSAP’s accomplishments, “the magnitude of the true effects is likely to be smaller than many central banks believe”. If the epigram misattributed to Mark Twain is to be believed, central bankers may be in danger of getting themselves into trouble.