Supply chain activity slid to an all-time low for a third straight month in May, according to data compiled in the Logistics Managers’ Index (LMI).
A Tuesday report aggregating responses from supply chain executives showed the index stood at 47.3, the first reading in contraction territory for the 6.5-year-old data set. The mark was 3.6 percentage points below the April level and notably below a neutral level of 50.
Further weakening in freight markets drove the decline.
The subindex for transportation capacity stood at 69.3, the 14th straight month of expansion. Transportation utilization registered a reading of 45.5 during the month, 9.5 points lower than in April and almost 19 points lower year over year (y/y).
The combination drove transportation prices to a level of 27.9, 8.9 points worse sequentially and the fastest rate of contraction ever recorded. The index’s pricing measure was more than 37 points worse y/y and 63 points lower than two years ago.
Further, respondents reported weaker trends in the last two weeks of the month, returning a reading of 24.1, nearly 9 points worse than the level recorded in the first half of May.
“No LMI metric is more reactive to movements in the macro economy than Transportation Prices, and the slowdown we’ve seen over the last two years is certainly reflective of the ongoing freight recession that was always going to be difficult to avoid after the runaway growth of 2020-20221,” the report read.
The pricing subindex includes fuel surcharges. Weekly diesel prices were down 30% y/y on average during the month.
However, pricing is expected to stabilize according to survey participants. The 12-month outlook for rates was 47.5, down just 0.6 points from April.
Chart: (SONAR: NTIL.USA). The National Truckload Index (linehaul only – NTIL) is based on an average of booked spot dry van loads from 250,000 lanes. The NTIL is a seven-day moving average of linehaul spot rates excluding fuel. Spot rates are currently 20% lower y/y. To learn more about FreightWaves SONAR, click here.
Inventory levels (49.5) were down 1.4 points in the month and into contraction territory for the first time since the early days of the pandemic. The subindex was nearly 20 points lower y/y and well below the all-time average of 62.1.
The rate of contraction also accelerated in the last two weeks of the month, with a reading of 41.5, more than 18 points lower than in the first half of the month.
The report showed that inventory continues to flow downstream to retailers and companies closer to the consumer. Downstream respondents registered a reading of 54.4 compared to manufacturers and wholesalers, which registered contraction at 46.7.
Further inventory contraction is expected as the 12-month outlook came in at 44.7.
“Without an influx of inventory for the holiday season, the freight market will continue to struggle,” the report said. “Whether or not a new wave of inventory is coming is unclear, with different groups holding different opinions.”
Inventory costs (64.4) saw the rate of growth slow again and was down nearly 24 points y/y.
“Essentially, we are seeing the amount of inventory on-hand decrease in many places, but the cost of holding it in stock is still high,” the report continued. “This may be partially because larger bulk goods are not moving quickly, and static inventories can be expensive.”
Warehousing prices (62.8) are also propping up the cost to hold inventory. While the subindex was down 7 points in the month and nearly 25 points lower y/y, it still remained firmly in expansion territory. The future outlook for warehouse pricing was 60.5, meaning that price growth will likely continue to occur at a similar pace over the next year.
Warehousing Capacity (56.7) continued to grow for a fourth consecutive month, following 2.5 years of decline. The subindex was 2 points higher in May than in April. The fast rate of inventory reductions in the second half of the month increased available space, pushing the data set to 62.5 by the end of the month.
“If this trend continues and there is no significant restocking at the end of the Summer, it is likely we will see Warehousing Prices begin to contract,” the report said. However, it also noted construction is likely to slow as “fewer leases are signed and some firms look to cut back on their warehousing footprint.”
Warehousing utilization (54.7) was down more than 18 points from a year ago and registered the second-lowest growth rate ever recorded. “This slowdown may indicate a decrease in demand for warehousing, despite capacity continuing to come online,” the report said.
An aggregate measure of logistics prices — inventory costs, warehousing prices and transportation prices — produced an all-time low reading in May, staying slightly in expansion mode. The data set has seen a rapid change from the all-time high set in March of last year.
“As logistics prices come down and eventually moderate we could see inflation continue to moderate, which may lead to a slowdown in interest rates and eventual recovery in the freight market,” the report said. “It appears that we will have to hit the bottom before a rebound can occur. The questions now are where that bottom is, and whether or not we are getting close to it?”
The LMI is a collaboration among Arizona State University, Colorado State University, Florida Atlantic, Rutgers University and the University of Nevada, Reno, conducted in conjunction with the Council of Supply Chain Management Professionals.
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