Emotion: The Economy’s Worst Enemy

Aug. 9, 2011
Freight shipments declined 3.7 percent in July from the previous month, a sign the sluggish economy is slipping, according to Cass Information Systems

Freight shipments declined 3.7 percent in July from the previous month, a sign the sluggish economy is slipping, according to Cass Information Systems.

The July drop was the first negative sequential reading for the Cass Freight Shipments Index since May, when it fell 0.2 percent after rising for three months. The shipping volume index rose 4.9 percent in June, hitting a three-year high. Freight payments also dropped 2.1 percent from July, although they were up 29.5 percent year-over-year, reflecting increases in spot market and contract rates.

For Cass, the drop in shipments and freight spending represents more than the typical June-to-July slowdown for truckers before their fall shipping peak.

“The recovery has almost lost steam,” said Cass, which bases its monthly shipping index on $17 billion in freight bills paid by more than a hundred large shippers.

Analysts from supply chain consulting firm TranSystems note that the freight industry would typically see a boost in volumes in July because of the build-up of peak season and back-to-school shopping, and they identify several factors that have led to a "later peak."

First, the problems in Japan are weighing on markets and parts supplies to global supply chains are still not fully recovered.

“Automotive makers believe that they won't be ready to get back to normal until the end of August or September,” a TranSystems analysis says. “Therefore, as these parts are slower to get into the global supply chain, there is a push-back in the speed with which inventories can physically be ready to filter back through the global distribution networks.”

A second mitigating factor are the odd economic readings that have companies going into the fall season more cautiously than they thought they would just three months ago.

“Although business inventories are extremely low at this time, there is still enough hesitation on behalf of the business community that they have started to adjust their order quantities,” TranSystems adds. “Many companies are also simply delaying their shipments to arrive in late August and early September to try and buy a few more weeks of stronger cash flow. If the consumer appears to be under more stress than originally thought, there is the potential for less spending and hence less need for robust inventories in the fall.”

A few rays of hope include the fact that corporate savings are at their highest levels in years ($1.9 trillion being held in cash) and business inventories are still extremely low (just off of 20-year levels). Couple this with the "fixing" and restoring of the Japan supply chain, and economic activity should pick up, TranSystems analysts believe. However, if the financial market continues to melt down, “the ripple effect and contagion created will filter through the broader markets and a real economic downturn is possible. That would be unfortunate, because it would be emotionally created, not based on market fundamentals,” they conclude.