Transportation capacity up, price hikes slow in April

Activity across the supply chain grew at a healthy clip during April but the pace of growth slowed to the lowest level recorded since January 2021, according to a monthly survey released Tuesday. A decline in transportation metrics, notably an increase in transportation capacity, were the catalysts.

The Logistics Managers’ Index (LMI), a measure of supply chain conditions, registered a reading of 69.7 in April, down 6.5 percentage points from March’s record. The index remained above its all-time average of 65.3.

The LMI is a diffusion index, wherein a reading above 50 indicates expansion while a reading below 50 indicates contraction.

The transportation capacity subindex came in at 56.9, 11.2 percentage points higher than the March reading and a return to expansion for the first time since May 2020. The growth rate was higher for upstream wholesalers and distributors (59.1) than downstream companies close to the end consumer (53.8).

“The trend line now takes a marked U shape, as capacity increases in April 2022 begin to resemble growth rates during the early stages of lockdown in April 2020,” the report read.

Twelve-month forward-looking sentiment from survey participants indicated the index will be at 62.4 a year from now, with upstream companies expecting more slack in supply than those downstream.  

“This might suggest that we will see a situation similar to 2018-19 when consumer retail demand buoys the freight market in the face of slower industrial demand,” the report continued.

The Manufacturing Purchasing Managers’ Index (PMI), a measure of production activity in the U.S., slid 170 bps to 55.4 in April, a separate report showed Tuesday. The dataset remained in expansion mode, however April was the lowest reading since July 2020.

With the rise in transportation capacity, pricing growth slowed during the month. The transportation prices subindex fell 15.8 percentage points to 73.9. This was the second-largest decline recorded in the index. The early days of the pandemic, April 2020, produced a 27.9-point drop.

The future index for pricing still shows growth. However, a forward-looking expectation of 68 was down from the 80.6 level captured just a month ago.

“We have often stated that transportation metrics are the most dynamic piece of the LMI and the most reflective of the overall economy,” the report stated. It noted that any inversion in the chart normally occurs when there has been a shift in the broader economy. “It can be observed that the two curves have not yet inverted, suggesting that while the frantic pace in the transportation market has slowed down, we have not yet tilted into a full-on recession.”

Transportation utilization (64.3) increased but at a slower pace in April. The subindex was down 550 bps from March.

“At this point the overall numbers suggest that the freight market is regressing back towards the mean,” the report said. “Smaller carriers, or perhaps carriers who came into the market very recently to take advantage of the rate of growth, may struggle with lower demand as shippers might be able to move away from the spot market and back towards contracted rates with more established carriers.”

‘The economy is clearly in a complex place’

The report noted a juxtaposition of economic conditions. On one hand, GDP is negative and the stock market is selling off. On the other, consumer spending was up in the first quarter, unemployment remains very low and wages are growing. But inflation, which has been stoked by higher fuel and gas prices, remains a risk.

Lockdowns in China have slowed the country’s PMI to 47.4, “solidly into contraction territory,” the report contended, and the lowest level since the early days of the pandemic. “It is not unreasonable to expect a slowdown at U.S. ports sometime in Q2 that is similar to what we saw in 2020, followed by further congestion as importers race to catch up.”

The report cautioned that unlike the 2020 lockdowns, U.S. consumers are not stuck at home this time. The implication is spending on goods will be competing with spending on services, “limiting the potential lifeline [final-mile delivery] that fleets enjoyed in the aftermath of China’s previous shutdown.”

Inventories up, space hard to find

Inventory levels (72.3) and inventory costs (87.7) continued to grow but the growth rates were off recent highs, with both indexes down 3.3 percentage points in the month.

With elevated stock levels, available warehouse space is limited. The warehousing capacity subindex (40.8) showed available space contracted at a slower pace in the month. The index has been sub-50 for 22 of the last 24 months.

“Storage space has been at a premium since the outbreak of COVID-19 and the glut of inventory that firms are currently holding has only exacerbated the issue,” the report read. The caution flag was raised that capacity could be pinched further when China’s lockdowns are lifted and freight flows to the U.S. en masse. “It is likely of course that there will be a subsequent rebound period, in which another deluge of goods come in and demand for warehousing capacity increases, placing a new wave of pressure on this space.”

The subindexes for warehouse utilization (70.9) and prices (85.8) cooled but stayed well into expansion territory.

“We may be seeing supply chains reset themselves more than we are seeing consumer sentiment fall off the deep end. Consumer spending held up the economy during the downturn in 2019 as well, but whether that can continue in the face of the highest rates of inflation the U.S. has experienced since the early 1980s, along with slower growth abroad limiting trade, remains an open question.”

The LMI is a collaboration among Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University and the University of Nevada, Reno, conducted in conjunction with the Council of Supply Chain Management Professionals.

Click for more FreightWaves articles by Todd Maiden.

• ArcBest blows past Q1 expectations; margins to improve further
• Schneider sees ‘healthy’ contract freight market
• Forward Air to hit 2023 EPS target a year early

Watch: Manufacturing’s Slower Growth

Source: freightwaves - Transportation capacity up, price hikes slow in April
Editor: Todd Maiden