Capacity Loosens

Transportation capacity expanded again for a second straight month in May after falling for nearly two years, according to the Logistics Managers’ Index (LMI). The LMI is a measure of overall supply chain conditions. It dipped 2.5 percentage points from April to 67.1 in May. A reading above 50 indicates expansion while a reading below 50 indicates contraction.

Overall activity in the supply chain remained firm during the month, however the transportation capacity subindex jumped 7.8 points to 64.7. This is the sharpest rate of expansion in the data since October 2019. After two years of rapid growth, the transportation sector is continued to move in favor of shippers. Expect spot rates to continue to weaken, rejection rates to continue to decline, and competition in the spoke market to heat up.

The capacity situation is more of a tale of two sides. Small carriers dependent on load boards and transactional freight have seen margins decrease as lower spot rates have been met by rising costs, particularly fuel. Large fleets however are still seeing increases in contract rates. Additionally, many fleet management teams are still looking for additional drivers and equipment.

Transportation utilization was flat at 64.3 during the month but the rate of growth in the pricing index slowed, down 8.6 points from April to 65.3. The slowest rate of growth in the prices data set since June 2020. The trend for rates isn’t expected to turn to the negative as respondents indicated a value of 68.4 in a year from now. “Despite this slowdown, it should be noted that we are still observing a healthy rate of growth in transportation, but one that pales in comparison to the unsustainable growth rates observed in 2021,” the report stated.

Additionally, the second half of May heated up. The pricing index was 16.1 points higher in the last 15 days of the month. Capacity growth slowed and utilization ticked higher.

“While there is often some seasonal contraction in capacity around Memorial Day, the size of the change suggests there could be more underlying the change,” the report added.

Inventories Growth Slowing

The LMI also showed that inventory levels, while still expanding (69.3), did so at the slowest rate so far this year.

The level was significantly off the 80.2-reading charted in February but still 10.6 points higher year over year. Additionally, the inventory growth rate accelerated 7.7 points in the second half of the month. “This means that seasonally speaking, inventories continue to increase more quickly than we would normally expect at this point of the year,” the report said.

The inventory costs subindex was slightly higher to 88.1. Costs are historically high year over year, but the composition has changed. “In 2021 costs were high due to the velocity at which goods were moving; in 2022, the costs are due more to the static buildup of goods.”

Warehouse capacity contracted for the 21st consecutive month. The subindex for warehouse capacity remained in contraction territory at 45.9, however was 5.1 points higher than in April. Capacity expanded slightly in the second half of the month. Amazon opening up 10 million square feet of warehousing space for lease” was cited as a potential stimulus.