Chart for the week: Logistics Managers Index – Transport Capacity, Transport Prices SONAR: LMI.TPCP, LMI.TPPR
When the transportation capacity component of the Logistics Managers Index (LMI) falls below the transportation price figure, capacity is relatively limited. When the opposite is true, the amplitude is generally loose. The past few months are trending toward another reversal that may indicate that the balance of supply and demand is closer than we thought in the transportation market.
The LMI has proven to be highly accurate in describing local transportation market conditions over the past several years. In a generally weak 2019 market, the price index was lower than the capacity index. In June 2020, the two components flipped and remained in strong opposition until March 2022.
The LMI is a penetration index based on surveys of more than 300 supply chain professionals to measure various components of the transportation and logistics industry. Values above 50 indicate expansion, while readings below 50 indicate contraction.
The latest October price reading was 44.4, indicating that prices were contracting but at a much slower pace than the 28 reading printed in April. The amplitude value for October was 56.7, which was a significant decrease from the 71 that occurred in May.
As you can tell, over the past five years, there has been little balance in the transportation markets, as they have moved violently from very tight to very tight. Coronavirus can be blamed for most of this. The 2017-2018 market was also very tight, but it was considered a “black swan” type environment at the time.
The truth is that the economic stability (or stagnation depending on your point of view) of the post-2009 recession may have been the real anomaly. Economically, there are more questions than answers, and this will keep companies on edge and make them more vulnerable to erratic behavior – especially in shipping.
On Freightonomics last week, Zach Rogers, assistant professor of supply chain management at Colorado State University and LMI contributor, talked about how shippers can return to a just-in-time shipping mode as demand remains uncertain and warehousing costs have increased.
He also noted how Yellow’s exit appeared to have helped accelerate the perception of reduced available capacity and supported prices at higher levels. The only thing that is not clear is to what extent this is happening.
Bid rejection rates, which measure the rates at which carriers reject or reject truckload capacity requests from their customers, bottomed in May as well and have trended higher since then — suggesting that the relationship between Yellow’s exit may be somewhat spurious.
Regardless of the reason, there are multiple data sources that paint the same picture. The carrying capacity is shrinking, although it is still not enough to cause disruption – yet. The bigger question remains when freight market participants will feel some noticeable and more consistent disruptions to service.
Warnings are always a thing
Perhaps the most ambiguous aspect of forecasting the transformation of the shipping market is the underlying economics. The advance release of Q3 GDP produced one of the most disconnected values in recent history in terms of economic perception.
The 4.9% quarterly growth figure seemed somewhat implausible in the context of what is usually considered a value that indicates economic prosperity. But economists at the Federal Reserve appear to have rejected that number, leading to a decline in consumer confidence.
The consumer spending that fuels this number is increasingly supported by credit card debt and the labor market is showing signs of weakness as people face increasing difficulties finding work as continuing claims reach their highest values since late 2021.
In the near future, the gap between the LMI numbers may reverse course over the winter if traditional seasonality returns. January and February tend to be the slowest months of the year for shipping. This would push demand down, causing the gap between the capacity ceiling to temporarily widen.
The gap between the LMI amplitude and price figures narrowed from 41 to 12 over a five-month period. The tremendous momentum suggests that we may be closer to a market reversal than we think, but the longest arena is always the last.
About the chart for the week
The FreightWaves Chart of the Week is a specific chart from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is selected from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week, a market expert will post a chart, along with comments, directly on the front page. The week’s chart will then be archived on FreightWaves.com for future reference.
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