Sentiment around transportation capacity signaled slight growth in July. However, readings on utilization and pricing increased more meaningfully, suggesting a freight market correction is on the horizon.
The Logistics Managers’ Index (LMI), a survey of logistics supply executives regarding eight key components of the supply chain, displayed a 50.9 reading for transportation capacity in the month. That was less than 1 percentage point higher than in June and just barely into expansion territory. Transportation pricing (63.8) increased 2.8 points, the highest reading since May 2022, while utilization (59.2) increased 3.5 points sequentially.
The LMI is a diffusion index in which a reading above 50 indicates expansion while one below 50 signals contraction.
The reading for transportation pricing was 12.9 points higher than the capacity reading, the largest gap since April 2022. This was the third straight month sentiment around pricing was ahead of capacity.
The report pointed to “excess capacity contraction and increasing demand” as the reasons for the changes. However, it said the improved demand could be tied to wholesalers “building up inventories early to stay ahead of tariffs and the potential shipping delays,” which if true, could be a headwind to freight demand in the coming months. It also referenced a potential work stoppage at East and Gulf Coast ports as a reason for a pull forward in demand.
“We have now had a full quarter of Transportation Prices coming in above Transportation Capacity. It is highly likely that the freight recession has ended,” the report said. “There could be potential headwinds from a slowdown in imports or a black swan event; but absent those, and if current trends continue and seasonality holds, it is likely that the recession that has gripped the freight industry is moving towards its conclusion.”
The one-year-forward outlooks on transportation metrics in July were less bullish than in June but still pointed to a recovery. The outlook for transportation capacity increased 6.4 points to a neutral reading of 50 while pricing fell 1.8 points to 78, which was still solidly into expansion territory.
The overall LMI stood at 56.5 in July, 1.2 points higher than in June. The index has reflected growth in the supply chain for eight straight months and 11 of the past 12 months. The current reading is still below an all-time average of 61.9 for the 8-year-old dataset but much higher than the year-ago mark of 45.4, which was an all-time low.
Sentiment around inventory levels (49.5) remained in contraction territory for a third consecutive month. However, upstream firms like manufacturers and wholesalers returned a reading of 54.7 compared to downstream companies like retailers (40).
“This suggests that retailers are keeping inventories lean at the start of Q3, while manufacturers, wholesalers, and distributors are building up goods in anticipation of increased demand later in the year,” the report said.
It said the lower inventory reading at the retail level was “because they are cycling through them quickly” and not due to low demand.
The combined inventory reading was higher in the last 10 days of the month (51.2) versus the reading for the first three weeks (44.8). Inventory costs (65.7) were up 2.1 points from June.
Warehouse prices (60.9) fell 3.6 points to the lowest reading in a year. Warehouse capacity (54.5) increased 1.9 points while warehouse utilization (57.9) increased 5.3 points.
Aggregate logistics prices, the combination of the LMI’s three cost metrics (inventory costs, warehouse prices and transportation prices), totaled 190.4 in July. The index has bounced from a low of 155 last June but remains well off the roughly 270 level recorded throughout a booming freight market in the back half of 2021.
The report said aggregate logistics prices are “a reliable predictor” of supply-driven inflation, a leading economic indicator.
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.