Transportation prices grow for first time in 19 months, survey says
Transportation prices flipped to expansion for the first time in 19 months as retailers increase inventories, a Tuesday supply chain report said.
The Logistics Managers’ Index (LMI) was up 5 percentage points to 55.6 in January with all eight components of the index signaling growth. The LMI is a diffusion index in which a reading above 50 indicates expansion while one below 50 signals contraction.
This index has been in expansion territory for five of the past six months.
“This growth is driven by an increase in the restocking of inventories — especially for retailers — after a busy holiday season as Americans are clearly feeling better about the overall economy,” the report said.
An inflection in transportation prices was likely the biggest takeaway from the report.
Transportation capacity (54.5) was still growing in the month but at a rate that was 8.8 points lower than in December. Transportation utilization (55) was up slightly, and after 18 months of contraction, transportation prices (55.8) jumped 12.7 points, firmly into growth territory.
“We need to see a longer period of growth to call an official end to the freight recession,” the report continued. “However, when taken together, January’s report does offer evidence that the logistics industry could be moving back into a period of growth after the long downturn that started in 2022.”
Transportation utilization was weaker in the back half of January at a neutral reading of 50 after starting the month at 61. The report said if the subindex falls back into contraction territory, meaning utilization rates on transportation equipment are falling, that “would put a damper on a potential freight recovery.”
However, it said transportation prices growing ahead of capacity is a sign of a changing cycle.
“It is worth noting that Transportation Prices and Transportation Capacity inverted this month, with the former now growing slightly faster than the latter. Every time there has been an inversion between these two metrics over the 7.5 years of this index it has signaled a shift in the market,” the report said.
The growth rate in prices occurred in the month even as diesel prices fell by a little more than 15% y/y.
Another positive catalyst for the transportation industry could come in the form of interest rate cuts as some analysts are predicting. Lower rates would likely result in more activity at upstream firms, like manufacturers and wholesalers, resulting in more “larger, bulkier shipments,” the report said.
Asked to predict these metrics one year out, respondents signaled a reading of slight growth for capacity (50.9) and more meaningful growth in utilization (61.9) and prices (73.7).
The indication for inventory levels (52.8) showed expansion for the first time in three months and was 8.5 points higher than in December. The report said many companies have redeployed just-in-time merchandise strategies versus the just-in-case approach that was prevalent during the height of the pandemic as companies looked to avoid running out of certain items.
Downstream companies (62.8), like retailers, were restocking at a brisk pace in January when compared to upstream respondents (47.1) that reported declines. An overhang of semiconductors was called out as a reason upstream companies were cutting stock levels.
Upstream providers don’t expect the trend to hold, though. The group returned a 68.1 reading on inventory levels one year from now while downstream companies returned a neutral response of 50.
Inventory costs (66.8) were up 11 points from December, in large part due to the growth in merchandise levels. Also, the comparison was less formidable as the subindex registered its lowest-ever monthly reading in December.
The warehousing metrics were all down but within 1.5 points of December readings.
Warehousing capacity (54.1) continued to expand modestly, with utilization (58.7) tapering from pandemic highs and prices (64.2) continuing to grow but at a slower pace.
Logistics real estate operator Prologis (NYSE: PLD) recently said occupancy will likely slip modestly in the first half of 2024 before climbing again in the back half. Occupancy across its portfolio was 97.1% in the fourth quarter, and it expects the full-year number to range from 96.5% to 97.5%. Prologis said annual rents will grow by 4% to 6% over the next three years but will only be slightly positive this year.
Respondents said the LMI will stand at 62.8 one year from now, which was 3.9 points higher than the reading a month ago and higher than the index’s average.
The LMI is a collaboration among Arizona State University, Colorado State University, Florida Atlantic University, Rutgers University and the University of Nevada, Reno, conducted in conjunction with the Council of Supply Chain Management Professionals.
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