Transportation market loosened as September progressed

Transportation capacity increased for a sixth consecutive month in September with prices falling for a third straight time, according to data released Tuesday.

The Logistics Managers’ Index (LMI), which is produced using responses from a monthly survey measuring supply chain activity, showed the transportation capacity subindex jumped 7.5 percentage points to 71.8 in the recent month. This was the second-highest level recorded in the six-year history of the data set and 48 points higher than the mark recorded two years ago when the economy was emerging from COVID lockdowns.

A reading above 50 indicates expansion while one below 50 indicates contraction.

“This month’s reading only trails behind April 2019’s reading of 72.0 — a reading which marked the beginning of the freight recession of 2019,” the report read. “Whether or not a freight recession similar to what we saw in 2019 is imminent or not, it is clear that the snapback that was always going to come after two straight years of contraction is here.”

The outlook for the next year calls for capacity to remain elevated as well. The forward-looking expectation inched one point higher to 65.3.

The transportation prices subset fell 3.5 points to 44.5, setting a two-year low and marking the second-lowest level in the index’s history. However, the future expectation (50.4) calls for flattish pricing over the next year. The future reading was 5.7 points weaker than the August level.

Peak season concerns rise as September unravels

The LMI data showed a notable deterioration in respondents’ sentiment in the back half of September. 

Survey responses for the overall LMI were 7.4 points weaker in the back half of the month compared to the first 15 days. The changes were notable in transportation metrics — capacity (9.2 points higher) and prices (14 points weaker) — which highlighted further loosening in the market at the month progressed. Inventory levels, however, fell 9.5 points in the last two weeks of September.

The transportation prices subindex was just 36.8 in the back half of September, appearing to reach a fork in the road.

“This rapid change may be attributable to the beginnings of a sharp slow down (potentially brought on by interest rates and inflation destroying demand), or conversely could be a wave of calm before increased activity we may see during Q4,” the report stated. “At this point is it impossible to tell for certain, but what is clear is that the rate of growth in the logistics industry slowed drastically in late September — a time when things would be picking up in normal times.”

The report noted many shippers pulled forward ocean shipping delivery windows this year to avoid the supply chain snarls that were prevalent last year. This was evident in recent inbound container metrics at the nation’s 10 largest ports. Loaded twenty-foot equivalent units were flat year over year (y/y) in August, but that was the fifth-busiest month all time for container imports. Facing elevated comps from a year ago, inbound TEUs were up 1.5% y/y in the three-month period ended in August.

This likely means warehouses have the inventory needed for the holiday buying season already in place, which could support truck demand in the fourth quarter assuming higher interest rates and inflation don’t curb consumer spending.

“Borrowing a concept from physics, perhaps this inventory can be viewed as potential energy, waiting to be released during the Q4 spending rush? If this turns out to be the case and transportation markets pick up to move this inventory to storefronts or directly to consumers, it might then convert to kinetic energy actively moving through supply chains.”

However, there are serious doubts about demand beyond the peak season.

Ocean container lines continue to cancel sailings. Roughly 40 scheduled services from Asia to the U.S. West Coast and 21 voyages to the U.S. East Coast have already been cut from the October calendar, according to a Wall Street Journal article. Also, spot rates from Asia to the West Coast have fallen by 50% since early August, with Shanghai-to-New York rates off roughly 25%.

Other LMI highlights

Overall, the LMI stood at 61.4 in September, 1.6 points higher than in August. High inventories, a lack of warehouse space and higher utilization metrics drove the increase.

The inventories subindex (71.9) was up 4.4 points, with inventory costs (77.2) remaining elevated. Already-high inventories throughout some retail supply chains and a pull forward of merchandise have placed upward pressure on warehousing metrics.

Warehousing capacity (44.3) remained in contraction for the 25th straight month. The metric was nearly 10 points tighter for downstream respondents, or those closer in the supply chain to the end consumer. Some of the difference was attributed to retail supply chains readying for the holiday rush.

Warehousing utilization (76.8) jumped 11.5 points to the second-highest reading all time. The tightness in logistics real estate markets kept warehousing prices (75.4) elevated. The prices subindex has been above 70, “a significant rate of expansion,” for two straight years.

Transportation utilization (61.1) rose 9.5 points. Utilization and prices are usually tightly correlated, but the recent divergence could be “representative of the push to cut costs at many firms, potentially by combining loads as much as possible.”

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.

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