This under-the-radar freight indicator is raising concerns that the US economy is slowing

• The Cass Freight Index, a broad measure of freight shipments, fell 3.2% year over year in April — even before the announcement of new tariffs on Mexico.
• The April report outlined a "material and growing downside risk to the economic outlook."
• In notes to clients, Morgan Stanley and Credit Suisse warn of red flags in the transportation market that could signal trouble in the broader economy.

A slowdown in trucking and transportation is causing some on Wall Street to worry about an impending deceleration in the U.S. economy.

The Cass Freight Index, a broad measure of freight shipment activity, fell 3.2% in April from the previous year. That drop was before President Donald Trump's surprise announcement last week of new tariffs on Mexico, suggesting growth was "slowing before the trade tensions re-escalated," Morgan Stanley strategist Mike Wilson said in a note to clients Monday.

"While we have seen many data points the past month supporting our view for an earnings recession and economic slowdown, none were as convincing as the Cass Freight Index report for April," Wilson said. "There is no broader measure of economic activity for the U.S. than Freight shipments."

The April freight report, written by Donald Broughton and published by Cass Information Systems, painted a bleak picture for the industry. Broughton, founder and managing partner of Broughton Capital, said he was "more cautious" today than since he "began predicting the recovery of the U.S. industrial economy and the rebirth of the U.S. consumer economy in the third quarter of 2016." With April's drop, Broughton outlined a "material and growing downside risk to the economic outlook."

A container delivery truck heads for one of the terminals at the Port of Long Beach in Long Beach, California.

Frederic J. Brown | AFP | Getty Images

To be sure, Broughton said more data in coming weeks was needed before calling whether or not this is "merely a pause in the rate of economic expansion, a retrenchment, or the beginning of an economic contraction." But falling oil prices, and five straight months of negative shipment volume are cause for concern.

"Evidence is accumulating that this is more than 'just a pause'," he said in the report. "If a contraction occurs, then the Cass Shipments Index will have been one of the first early indicators once again."

Shares of Kansas City Southern, Union Pacific Corporation, Fed Ex, other freight companies have taken a hit in recent weeks on news of tariffs on Mexican imports. Roughly 30% of Kansas City Southern's volumes are exposed to cross-border Mexico traffic, while Union Pacific has around 11%, according to Credit Suisse research analyst Allison Landry.

Landry found that the entire market is baking in a roughly 10% drop in cross-border traffic and a 25% to 30% decline on northbound imports alone.

Credit Suisse also highlighted Werner Enterprise, Schneider National, Knight-Swift Transportation Holdings and XPO Logistics as stocks exposed to the same cross-border risk.

Landry said it's "hard not to be worried," considering pre-existing freight red flags even without an escalating trade war.

"While we don't want to over-react, we're already nervous about the slew of red flags that have presented themselves in the freight sector," she said, citing a prolonged contraction in truck load rates, contract rates, and two consecutive quarters of rail volume declines. "How much longer can we blame weather and tough comps?"