A third-quarter survey of shippers showed the freight industry has moved “deeper into limbo” as excess inventories have largely been purged but there is still no need to immediately restock.
Shippers registered a slightly lower overall view of the economy this quarter, returning a 4.9 reading on the 20-year-old Morgan Stanley (NYSE: MS) data set where the all-time high is 7.7 and the low is 4.2. A more constructive outlook among retail shippers was reported, with the subgroup registering a 6 rating on the economy, which is just slightly into positive territory.
True retail shippers account for just 2% of the overall survey; however, food and beverage segments account for 14%. One-third of responses come from 3PLs, with the bulk of the remainder skewed toward industrial markets.
Inventories continued to decline among the entire group, with the report concluding “net inventory vs. ordering is approaching breakeven levels.”
Shippers planning to maintain inventories increased 5 percentage points to 55%, which is an all-time high. Those looking to reduce inventories fell 7 points to 41%. The problematic part for carriers is only 5% of shippers polled are looking to increase stock levels.
Even with the modest improvement in the survey (60% will maintain or increase inventories compared to 52% last quarter), 64% of respondents don’t expect inventory levels to normalize until next year, with a slight majority expecting the change to occur in the second half of the year.
One-third said their inventories have already normalized or will do so before 2023 ends.
Data compiled in the Logistics Managers’ Index — a survey of supply chain executives released last week — showed inventory levels contracted for a fifth straight month in September. A reading of 47.4 was 24.5 percentage points lower year over year (y/y), remaining below a neutral level of 50.
“Despite the mixed messaging, it is clear that Shippers are continuing to wait before hitting the restock button, even as the inventory situation rapidly improves,” Morgan Stanley analyst Ravi Shanker said. “Perhaps they are waiting for a final decision on whether consumer spending remains resilient or rolls over, perhaps they are waiting for interest rates to decline, perhaps they are waiting for a new fiscal year and/or new budgets.”
Expectations around transportation capacity indicated further loosening for all modes except for less-than-truckload and truckload. Those polled said LTL capacity will be tighter six months from now, returning a “balanced” reading of 5 compared to a 4.5 reading in the second quarter. Much of the change was attributed to the exit of Yellow, which has pushed shipments higher across most LTL carrier networks.
All public carriers reported a positive sequential inflection in shipments during the first two months of the third quarter, with Saia (NASDAQ: SAIA) seeing the largest y/y increases. Saia’s shipments were up 14% in August following a 6% increase in July. XPO (NYSE: XPO) reported increases of 9% and 8%, respectively, with ArcBest (NASDAQ: ARCB) saying shipments at core accounts increased 20%.
The survey showed truckload capacity expectations stepped up to 4.3 from 4.1 but remained on the “abundant” side of the 1-to-10 scale.
“It is interesting that LTL expectations did not materially outperform TL, showing that the YELL exit a) may not be as impactful for the overall Trucking space as the market thinks and b) TL may be a close second derivative beneficiary,” Shanker said.
A separate Morgan Stanley survey on peak season expectations showed 69% of carriers and brokers expect less activity this year than last. In total, 94% of carriers and brokers said the 2023 peak would be in line or worse y/y. Conversely, 61% of shippers expect this year’s peak season (freight volumes) to be level or better than in 2022.
“The slight disconnect could lead to a slightly better than expected peak season for carriers and brokers as shippers appear to be willing to increase order levels for this holiday season in excess of current expectations,” Shanker said.
Shippers may be waiting for more evidence on consumers’ buying intentions before moving goods as transportation capacity remains abundant unlike in prior years when capacity commitments needed to be locked up earlier in the season. Also, mistakes made overordering merchandise, which resulted in bloated stock levels last year, are likely etched in the memories of supply chain managers.
Shanker noted some optimism for carriers even if it may be later than sooner.
“Shippers continue to wait for an inflection but the longer they wait, the more pressure will build for the restock to come,” he said.
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