Chart of the Week: Logistics Managers’ Index – Inventory Levels, Outbound Tender Volume Index – USA SONAR: LMI.INVL, OTVI.USA

The Logistics Managers’ Index (LMI) inventory level component increased from 55 to 57 from November to December, indicating inventory growth accelerated for the first time since the summer as trucking demand as measured by the Outbound Tender Volume Index fell. This divergent signal is an early sign that demand for goods is eroding faster than companies are expecting. 

Trucking companies are hopeful that inventories will be rightsized in the first half of the year, but this chart shows that is not a given. Companies have struggled with demand forecasts coupled with supply chain congestion since 2020. Transportation networks are now mostly unclogged and shippers are receiving their orders on a more timely basis. The problem may be that now the demand for their goods is eroding faster than they expected as they try to reduce their inventory levels. 

The LMI is a diffusion index that measures expansion (values over 50) and contraction (values under 50) of various logistics functions based on surveys of supply chain professionals. The inventory level component fell from an all-time high of 80.18 — anything over 70 is extreme — last January to 54.8 in November, indicating that inventories went from growing at light speed to crawling. 

While December’s value of 57.3 is still not extreme, it is moving in the wrong direction for many shippers. The fact that trucking demand fell simultaneously suggests that companies still do not have proper alignment of ordering cadence to sales.  

One of the country’s largest shippers, Walmart, said it is making a concerted effort to reduce inventories heading into 2023 but still had inventory aging issues late last year. 

Consumer conditions have only deteriorated and the full brunt of the Fed’s war on inflation has yet to be felt throughout the economy. 

Consumers are saving less and have returned to incurring debt at nearly the same pace they were prior to 2020. With interest rates increasing, this debt is more expensive than it was before the pandemic and will reduce consumers’ spending ability in the future. This is a big gray area for many companies trying to forecast demand this year. 

Transportation providers are already bracing for hitting a bottom of the freight market in regard to demand this winter. Many trucking companies were able to stockpile cash during the pandemic as rates increased and provided much higher margins. Selling used equipment at all-time premiums also assisted in filling the coffers. 

This will pad their landing for a while, but smaller operators have been crushed by rising fuel costs and a collapsing spot market and don’t have the legroom for an extended period of low demand relative to capacity. 

Inventories being rightsized in relation to demand may provide stability to shipping patterns, but it is by no means the end to the down cycle. It will just mean shipping will become more predictable.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen 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 commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.

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