Supply Chain Matters highlights continued evidence that the U.S. freight and logistics industry continues to mitigate recessionary conditions including the April 2023 Logistics Manager Index reaching its lowest level lowest level in six years and one-half years. That stated, there are some new signs of optimism.
The Logistics Managers Index Report®, compiled by researchers at Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University and the University of Nevada Reno, and in conjunction with the Council of Supply Chain Management Professionals (CSCMP), reported an April 2023 value of 50.9, 0.2 percentage points below the March value of 51.1. The LMI has now declined 6.7 percentage points from the January reading of 57.6, continuing to reinforce recessionary conditions for the U.S. freight, logistics and parcel movement industry.
According to the April report commentary, the industry remains hopeful in new signs indicating that retailers and manufacturers are getting closer to working off the overall glut of inventories that resulted in 2022. Transportation prices reportedly contracted for the tenth consecutive month, but authors pointed to a lessened rate in the April data. Further indicated was: “whether or not we have hit bottom of rates is unclear.” The April report commentary took note that European and U.S. business activity increased in April at the fastest pace in nearly a year, driven by services activity and a milder than expected winter season.
Added Reinforcement
Inventory Levels
This week’s report by The Wall Street Journal, Retailers New Restocking as Inventory Paring Winds Down, (Paid subscription or metered view), took note that larger retailers, reporting their latest quarterly financial reports, are now indicating that inventory levels are more aligned, and that planning is underway for the fall and second-half buyer season. As an example, retailer Walmart indicated has reportedly cut inventory levels by 9 percent this year while Target reported that inventories were 16 percent lower than the year-ago period.
Global Manufacturing Activity Levels
Global manufacturing activity as depicted by the J.P. Morgan Manufacturing PMI®, compiled by S&P Global in association with ISM and IFPSM, provided a banner headline of global manufacturing output edging only slightly higher In April. Supply chain pressures reportedly eased to the greatest extent in 14 years. That stated, the reported value of 49.6 was unchanged as that of March and the April data indicates that the global wide PMI has now stayed below the neutral 50 mark for eight consecutive months, reflecting that manufacturing recession conditions continue. The underlying data would also reflect that while some global regions are experiencing optimistic consumer demand, the sentiment for the U.S. remains unclear. The two U.S. surveys both indicated that businesses are reluctant to place new orders amid higher material prices and continued economic uncertainty.
Container Shipping Industry
The quarterly performance of ocean container shipping lines continue to reflect decreased volumes and significantly reduced profitability levels amid this industry’s reported 30 percent reduction in scheduled route capacity.
Drewry’s composite World Container Index reportedly decreased by 1 percent to $1,719.95 per 40 foot container last week, down 78 percent from the same year-earlier period. Spot rates for the Shanghai to Los Angeles shipping lane segment reportedly averaged $1823.
The industry consensus right now is that container volumes will decrease upwards of 2.5 percent this year.
Earlier this month, A.P. Moeller Maersk reported a sharp drop in first quarter net profits and further warned that first quarter results “will be the best quarter of the financial year.” The firm’s Maersk Line container shipping business unit reported net profit of $2.3 billion compared to $6.8 billion in the year earlier quarter. Revenues associated with the shipping business reportedly fell 37 percent, and were driven primarily by a 9.4 percent decrease in container volumes. Freight rate reportedly fell 37 percent. That stated, Maersk executives noted: “proactive cost containment measures have been successful, and the Ocean contract negotiation season is proceeding in line with expectations.”
Hapag-Lloyd, the fifth largest container line by capacity reported a 33 percent decline in revenues in its first quarter with a 4.9 percent drop in cargo volumes. CEO Rolf Habben Jansen indicated to investors that the destocking trend hampering the industry shows signs of easing and at some point the carrier will experience a pick-up in shipping demand.
Imports among the U.S. largest ports have been reportedly falling at double-digit rates for several months. According to data from Bloomberg Intelligence, container trade for the Asia to North America segment fell 26 percent during Q1 of this year. The open question is whether such declines reflect a return to pre-pandemic shipping volumes. A further open question is whether businesses will continue to route imports away from major U.S. West Coast ports in favor of other ports such as Houston and major U.S. East Coast ports. Labor contract negotiations among the labor union representing U.S. West Coast dock workers and the Pacific Maritime Association having dragged on since last June have caused many businesses to re-route imports to other ports. While current reports indicate that an announced agreement may be in-sight by next month, the question remains as to whether a structural change in the logistics of imports will be more permanent after labor agreements are completed. The industry will likely not know the answer until 2024.
Freight and Parcel Transportation
The authors of the April LMI report take note that first quarter earnings for UPS, JB Hunt and Knight Swift Transportation all missed expectations and: “a far cry from the optimism many carriers were espousing back in January.”
In the specific case of UPS, the carrier and logistics services provider has now been forecasting a decline in annual revenues since the recession of 2009. CEO Carol Tome indicated to investors that the pullback in shipping volumes handled in March was especially biting. Further, UPS has now entered labor contract negotiations with the Teamsters Labor Union with a threat of a potential work stoppage possible this summer if the parties cannot come to an agreement. At the same time, rival FedEx is in-turn, undergoing a reported significant business restructuring plan. significantly reduce costs and operating margins while shedding staff. Reportedly as of February, 12,000 FedEx positions were eliminated including a 10 percent reduction in corporate staff and the established goal is to save $4 billion in costs in fiscal 2025, and a cumulative $6 billion in costs by 2027.
Commentary Takeaways
While the U.S. freight and logistics industry, and perhaps the European industry as well, would want to believe that consumer demand levels and consequent freight volumes will increase in the second half of this year and improve significant available capacity and demand imbalances, further evidence is required.
For manufacturers and retailers who have relied on lower spot rates in dedicated needs to be able to significantly decrease shipping and logistics costs in 2023, the challenge is now in determining whether market shifts are indeed occurring and to reinitiate lock-in contract rates with carriers for the remainder of this year and perhaps the following year. CFO’s remain eager to reduce costs with the threat of an actual economic recession in the U.S. or other regions still unclear in the coming months.
It is a difficult challenge for all parties involved, one that requires added insights into specific industry and market demand and capacity supply dynamics, and one that requires sophistication in what-if scenario decision making.
Bob Ferrari
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