Chart of the Week: Logistics Managers’ Index – Transportation Capacity, Transportation Prices SONAR: LMI.TPCP, LMI.TPPR
When the Logistics Managers’ Index (LMI) transportation capacity component falls below the transportation price figure, capacity is relatively tight. When the inverse is true, capacity is generally loose. The past few months are trending toward another flip that may suggest equilibrium of supply and demand is closer than we thought in the transportation market.
The LMI has proven to be very accurate in describing domestic transportation market conditions over the past several years. In the generally soft 2019 market, the price index was below the capacity index. In June 2020, the two components flipped and remained in strong opposition until March 2022.
The LMI is a diffusion index based on surveys of more than 300 supply chain professionals measuring various components of the transportation and logistics space. Values above 50 indicate expansion, while sub-50 readings are indicative of contraction.
The most recent October reading for prices was 44.4, indicating that prices were contracting but at a much slower pace than the 28 that was printed in April. The October capacity value was 56.7, which was down significantly 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, moving violently from very tight to very loose. COVID can be blamed for most of this. The 2017-18 market was also very tight but was considered a “black swan” type of environment at the time.
The reality is that the economic stability (or stagnation depending on your perspective) of the post-2009 recession may have been the real anomaly. Economically speaking, there are more questions than answers and that will keep companies on edge and more prone to erratic behavior — especially in shipping.
In this past week’s Freightonomics, Zac Rogers, assistant professor of supply chain management at Colorado State University and contributor to the LMI, talked about how shippers have reverted to more of a just-in-time pattern of shipping as demand remains uncertain and warehousing costs have increased.
He also cited how Yellow’s exit has seemingly helped accelerate the perception of a decline in available capacity and propped prices at higher levels. One thing that isn’t clear is to what scale this is occurring.
Tender rejection rates, which measure the rate carriers reject or turn down requests for truckload capacity from their customers, bottomed in May as well and have been trending higher since then — suggesting the correlation between Yellow’s exit could be spurious to some extent.