Economic forecasters may continue to be divided about whether we are headed towards a recession or just a period of slower growth, but the signals coming from the United States logistics industry definitely are not looking particularly hopeful.
The Logistics Managers Index hit a new all-time low in April, creating concerns about the future of the economy and logistics industry providers, according to the monthly survey of supply chain executives that sponsored by the Council of Supply Chain Management Professionals.
The index that results is a joint project of researchers at Arizona State, Colorado State, Florida Atlantic, Rutgers Universities, and the University of Nevada, Reno.
The LMI score is a combination of eight unique components that make up the logistics industry, including: inventory levels and costs, warehousing capacity, utilization and prices, and transportation capacity, utilization, and prices.
It is calculated using a diffusion index, in which any reading above 50.0 indicates that logistics is expanding while a reading below 50.0 is indicative of a shrinking logistics industry.
The LMI weighed in at a total of 50.9 in April. Although this is only slightly down (-0.2) from March’s reading of 51.1, it marks a new nadir in the 6.5-year history of the index, the researchers said.
“This new low is being driven by a dip in inventory levels, which are down (-4.7) to 50.9, suggesting that respondents continue to get closer to properly balancing their supply of goods and working through the glut many of them have been saddled with for the last year,” according to the report.
The drop in inventories has led to a significant (-9.9) drop in warehousing utilization which in turn has dropped warehousing prices – particularly for downstream firms – as the metric reads in below 70.0 for the first time since August 2020. This is just after inventory costs dipped below 70.0 in March for the first time in over two years, demonstrating the somewhat lagged nature of warehousing costs.
The researchers noted that U.S. GDP registered only 1.1% growth in the first quarter. This was down from the 2.6% expansion in Q4 of 2022 and came in lower than economic analysts had expected and is linked to lower logistics activity.
“Like what we saw in Q2 of 2022, the largest downward pull came from the reduction of inventories, which took 2.26 percentage points off of expansion,” they said.” This is consistent with the downward trend that we have observed with inventories throughout 2023.”
Inventory levels are down 11.5 points since January (and were down 4.7 points from March) to 50.9 – which is right on the verge of contraction, the report observed.
Inventory levels actively contracted in the second half of April (at a rate of 42.6 relative to the 63.3-point expansion in the first half of April). “If this trend continues and we see contraction in May, it would be the first time since February 2020 that inventories have not increased,” the researchers pointed out.
The drop also led to a mild slowdown (-0.9) in the expansion rate of inventory costs, which read in at 66.0 in the index. The researchers said that inventories are moving quickly for consumables, but more slowly for more expensive goods.
March retail sales were down in the U.S., particularly for large items like autos, appliances and furniture that require financing. The decrease in spending on big-ticket items was a contributing factor to the 0.5% month-over-month decline in manufacturing output over the same period.
At the same time, consumers have been willing to absorb higher prices for restaurants, groceries, and home necessities such as diapers and soap and spending on services such as dining at restaurants and bars is up by double digits year-over-year.
“When taken together, it is clear that the overall economy continues to be powered by downstream activity, and that the complications of the bullwhip that started in 2022 continue to echo through the first few months of 2023,” the researchers said.
Despite the fact that the U.S. added 236,000 jobs in April warehousing and storage employment decreased by 12,000, offering new evidence of logistics’ decline.
Warehousing utilization had the biggest change of any metric in the April report, dropping 9.9 points to 55.1 from March.
“Utilization dipped significantly in the second half of April, moving from expansion of 61.1 in the first half of the month to 50.0 and no movement at all in the second half.,” the report noted. “This metric has been volatile as of late.”
This was the fourth month-over-month shift of 8.0 points or higher since August 2022. Warehousing prices are down (-1.1) to 69.8 – the first reading
below 70.0 since August 2020. “High storage costs have been a thorn in the side of supply chains and consumers for nearly three years,” the report said.
Transport Overcapacity Persists
Although trucking jobs rose slightly by 3,000, part of that could be because owner-operators are converting to company driver positions because the amount of available freight has declined, and due to the pressure that has been exerted by legal restrictions on independent contract carriage in states like California, according to the researchers.
Many small fleets that thrived during the Covid pandemic have gone out of business and larger transporters like UPS and Amazon have cut back on driver employment.
The result is it appears we are in a freight recession. Consumer spending on things like services remains high, but bulky goods are not being shipped B2B and trucking capacity is sitting idle.
“Whether or not we have hit bottom on rates is unclear,” the researchers said. “The spread between the spot and contract market reached $0.92 per mile in the last week of April.” However, they are hoping that the cheaper rates will prove to be attractive enough to drive increases in traffic in the near term.”
Respondents were asked to make predictions about movement in the overall LMI and its individual metrics 12 months from now. The future predictions in April continued the recent trend of respondents predicting relatively muted levels of growth across the logistics industry, according to the report.
They also are anticipating that inventory levels will continue to come down over the next year, moderating inventory costs and warehousing prices.
Those polled for the LMI also are not optimistic about transportation prices expanding, but the reading of 48.1 does suggest that respondents are at least expecting transportation markets to stabilize somewhat, something which would be welcome news for carriers.
“The freight market seems likely to remain depressed until the program of interest rates slows down and more confident spending leads to volumes being flowing more freely,” the researchers believe.