Logistics Managers' Index Supportive Of Truck Capacity Correction, Disappoints On Inventory Build Ahead Of Peak

The Logistics Managers' Index (LMI) remained level at 56.6% for September, tied with August for the second-lowest readings in the index's history. The index has declined meaningfully from September 2018's reading of 70.8%.

LMI Composite Measure (SONAR: LMI.TOTL)

The LMI is a diffusion index, wherein a reading above 50 indicates expansion and a reading below 50 indicates contraction. The index of North American logistics executives measures eight components germane to the freight industry – inventory levels, inventory costs, warehousing capacity, warehousing utilization, warehousing prices, transportation capacity, transportation utilization and transportation prices.  

Seven of the eight components provided readings below their historical averages with only transportation capacity coming in above average.

The Transportation Capacity Index showed a September reading of 59.5%, down 5.3 percentage points from August, but well higher than the 41% level in September 2018. The index peaked at 72% in April 2019.

LMI Transportation Capacity (SONAR: LMI.TPCP)

From the press release, "It should also be noted the data indicates a score of only 47.4% for the next year, projecting expectations of tightening transportation capacity in the next 12 months. This may indicate that professionals are bullish on a recovery in the transportation sector during the next year."

The survey's sentiment on transportation capacity is in-line with recent trends in Class 8 truck orders. The strength in truckload (TL) demand in 2018 resulted in many fleets increasing tractor counts to take advantage of a supply-constrained TL market wherein spot rates surged. As excess truck capacity came on to the market and volumes slowed, spot rates declined materially, requiring most TL fleets to reduce their tractor counts. The result has been a sharp decline in new truck orders. New orders are running at roughly 150,000 units on a seasonally adjusted annual rate, compared to standard replacement demand, which is estimated to be 250,000 to 300,000 units on an annual basis.

Also, TL capacity is expected to be challenged further as fleets fail, capacity is cut at small and mid-sized carriers, the new phase of the electronic logging device (ELD) mandate and drug and alcohol clearinghouse reporting begin.

Further supportive of this trend is the Transportation Utilization Index which increased 3 percentage points month-over-month in September to 58.1%. The index is well off the 51.5% low recorded in June, recording its third month of consecutive improvement. However, the future Transportation Utilization Index is expecting to moderate as it indicates a 57.6% level over the next 12 months.

The Transportation Prices Index has basically flatlined after steady declines from the March-April 2018 reading of 95.8%. The index appears to have bottomed at May 2019's 48.6% reading with September barely recording expansion at 50.6%. However, expectations for the index over the next 12 months calls for a 68.1% level, well ahead of the readings over the last six months and up 1.4 percentage points from last month's future expectations. This level is similar to those recorded in January and February 2019.

LMI Transportation Prices (SONAR: LMI.TPPR)

Warehouse capacity was up 4.4 percentage points to a 2019-high of 54.4%, but the report was unable to determine if this was caused by a decline in demand or if it was due to new capacity coming online after a sustained shortage. Warehouse utilization was 65.8%, 1.8 percentage points higher than August, but still lower than the 73.1% reading from a year ago. Warehouse prices remained virtually level at 69.6%.

Lastly, inventory levels declined 4.5 percentage points to 55.1%, well off the recent high of 67.2% in July. The report called into question the lack of inventory build ahead of peak shipping season. By comparison, inventory levels registered at 65.7% in September 2018.

The LMI is a collaboration between Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University and the University of Nevada, Reno, conducted in conjunction with the Council of Supply Chain Management Professionals (CSCMP).

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