Stable Transport Capacity in September, Plus Price Hikes, Suggests Freight Market May Be Emerging from Prolonged Slump.
The transportation capacity remained stable in September, while prices continued to rise moderately, according to a supply chain sentiment survey released on Tuesday. This is the second time this year that the transportation capacity index has not expanded, signaling that the freight market may finally be turning around (the last contraction of the transportation capacity index was in March 2022).
The monthly survey of supply chain executives shows that the Transportation Capacity Index within the Logistics Manager Index (LMI) for September stood at 50, down by 6.7 percentage points from August. The LMI is a diffusion index where readings above 50 indicate expansion and below 50 indicate contraction.
Respondents’ forward-looking expectations are that the transportation capacity index will significantly contract to 44.2 one year later, with the latest forecast dropping by 8.2 points from last month’s expectation. The report also warns that prolonged strikes at East Coast and Gulf ports may substantially suppress transportation capacity.
“One of the reasons for high freight costs in 2021 was the imbalance in freight capacity,” the report stated. “A large volume of goods entering through West Coast ports led to trucks constantly returning to Southern California to pick up these expensive shipments, resulting in a shortage of transport capacity across other parts of the country.”
The transportation utilization rate for September stood at 57.6, remaining within the expansion zone but down by 1.9 points from August. Transportation prices were recorded at 58.4, a decrease of 3.2 points month-over-month (MoM), yet they have been continuously increasing for five months, marking the longest positive growth period since early 2022. The pricing index forecast for one year later is expected to be 80, indicating “a full recovery in the freight market.”
Notably, downstream companies such as retailers showed a higher price environment with a reading of 68.3, exceeding upstream suppliers (manufacturers and wholesalers) by over 13 points. This change was mainly attributed to retailers receiving inventory that had been stored upstream for several months ahead of the peak season.
The overall inventory level stood at 59.8, up by 4.1 points from last month (higher than a year ago but below the excess inventory levels in 2022), leading into “what is expected to be the busiest peak season since 2021.” Downstream companies’ inventories finally entered the expansion zone with a reading of 56.7, up by an entire 10 points from August.
“This represents some relief for upstream supply chains as those backlogged goods are waiting like dark clouds to be gradually released as we enter Q4,” the report stated, noting that some companies received shipments earlier this year to avoid potential disruptions at East Coast and Gulf ports.
The report also noted that downstream companies have been practicing just-in-time inventory management due to sufficient transportation capacity. They “felt secure waiting for longer shipping times because they knew they could find affordable transport options to move goods down the supply chain.”
Given higher inventory levels, September’s inventory costs were at 71.3, up by 2.3 points month-over-month (MoM), marking the first time since February 2023 that this index exceeded 70. Increased activity in downstream supply chains has driven up warehousing and transportation prices in this segment, “indicating a restart of retail supply chains for the peak season.”
Warehousing capacity stood at 55.9, down by 3.7 points month-over-month (MoM), while utilization was at 60.9, up by 3.3 points. These changes have pushed warehousing prices up by 3.2 points to 66.9. Downstream warehousing price sentiment stood at 75, 10 points higher than upstream levels, “further confirming that retailers increased inventory towards the end of Q3, expecting a strong Q4.”
The overall LMI was at 58.6, up by 2.3 points month-over-month (MoM), reaching its highest level in two years. This marks ten consecutive months of expansion, “strongly indicating that the logistics industry is regaining its footing.” Despite this eight-year-old dataset being below its historical average of 61.8 for 24 consecutive months, the report stated, “this situation may not last long” as inflation slows and the Federal Reserve lowers interest rates.
The LMI forecast for one year out stands at 65.4, up by 3 points from August.
LMI is a collaborative project between Arizona State University, Colorado State University, Florida Atlantic University, Rutgers University, and the University of Nevada, Reno in conjunction with the Association of Supply Chain Management professionals.
Source: FreightWaves
