Jan 18, 2024

December Sees Increase in Transportation Capacity as Prices Continue to Decline

December is known as a month of giving, celebration, and reflection. It is also a time when transportation companies see a significant increase economic growth or growth rates in capacity and a decline in prices.

With the festive season just around the corner, consumers are on the lookout for the best bargains to travel and ship their goods. This year, however, the transportation industry is experiencing a unique phenomenon.

Not only are the prices decreasing, but the excess capacity is also on the rise. This trend has caught the attention of both industry experts and consumers, raising questions about its causes and potential long-term effects.

In this article, we will delve into the reasons behind this December's increase in transportation capacity and decline in prices, and explore its impact on both businesses and consumers.

From supply chain disruptions to changing consumer behaviors, we will examine the various factors contributing to this trend and what it means for the transportation industry as a whole. So, let's take a closer look at why December is shaping up to be an unprecedented month in the world of transportation.

The latest survey of supply chain executives reveals that transportation metrics experienced a further decline in December. Notably, capacity in the transportation sector increased at a faster pace, while prices continued to decline at a higher annual rate. However, there is a glimmer of optimism as some executives anticipate a potential turnaround in the new year.

The Transportation Capacity Registered A Reading

According to the Logistics Managers' Index (LMI), the transportation capacity registered a reading of 63.3 during December, which was 1.5 percentage points higher compared to November. The LMI is a diffusion index that considers a reading above 50 as indicative of expansion and below 50 as a signal of contraction.

The rate at which transportation capacity is expanding in the second half of the month was 10 points higher than in the first half.

The transportation utilization metric also saw an increase in December, with a reading of 54.6, which was 4.6 points higher than the previous month. This rise was mainly attributed to last-minute holiday-related shipments, as indicated in the Tuesday report. Notably, the metric experienced a significant surge of 8 points in the latter half of the month.

Downward Trend

In terms of transportation prices, they continued their downward trend, with a reading of 43.1 in December, down 1.1 points from November. It is worth mentioning that the pricing index seems to have reached its lowest point in May at 27.9, and the rates of contraction have been relatively less severe over the past five months.

The decline in fuel prices, resulting in lower fuel surcharges, was identified as a contributing factor to this decline.

The report highlights the significant role of fuel prices in supply-based inflation over the past couple of years. Consequently, a decrease in costs is expected to further push inflation down and potentially revive the freight sector in 2024.

Furthermore, respondents were asked to provide their predictions for conditions one year ahead. The forward-looking expectation for transportation capacity was 51, while prices were anticipated to come in at 70.3. These projections offer insights into the future trajectory of the transportation sector.

According to the report, the occurrence of both these figures would mark a significant turnaround and definitive conclusion to the prevailing freight downturn observed since April 2022.

Experienced a Shift Back

In December, the overall LMI (50.6) experienced a shift back into expansion territory. Over the past five months, the index has mostly remained around the 50 mark, except for October when it reached 56.5.

This change can be attributed to the upward movement in the warehousing components of the data set. Although warehousing capacity (55.1) grew at a slower pace during the month, utilization (60.2) increased by 7.3 points and prices (65.5) rose by 1.3 points.

Interestingly, warehouse space was in high demand for downstream companies such as retailers, leading to a contraction rate of 43.9. On the other hand, upstream firms at the wholesale and manufacturing levels of the supply chain witnessed an expansion rate of 60.6. Downstream respondents foresee a surge in warehouse prices (79.7) in the coming year.

Inventory levels (44.3) continued to decline at the same rate observed in November. This index has contracted in seven out of the past eight months, indicating that retailers have reverted to just-in-time inventory practices, which bolsters transportation utilization.

The report highlights that it will be intriguing to observe whether this trend changes in the new year or if the current point represents the lowest level, prompting manufacturers and wholesalers to start rebuilding their inventories.

A Neutral Outlook

According to the latest report, downstream respondents expressed a neutral outlook on inventory levels for the upcoming year. However, those upstream indicated their intentions to increase stockpiles during that time, which the report identified as a significant indication that retailers are aiming to return to just-in-time (JIT) practices and move away from the unpredictable inventory fluctuations experienced in recent years.

Notably, inventory costs experienced a considerable decline of 6.3 points during the month and reached the lowest level ever recorded in the seven-year data set. It is worth mentioning that this cost index has never entered into contraction territory. Inventory costs experienced a significant increase of 15.9 points within the retail segment of the supply chain.

Lead to More Predictable Seasonal Shipping Patterns

The report suggests that the actions undertaken post-pandemic to reduce inventories could lead to more predictable seasonal shipping patterns this year. It highlights that after months of lean inventories, the implementation of inventory reduction practices in 2024 may result in a return to normal seasonality, ultimately driving capacity utilization in warehousing and freight.

Looking ahead, the forward-looking prediction for the overall index in December stands at 59.9, showing a sequential increase of 2.5 points and aligning closely with the historical average of the data set, which is 62.5.

The Logistics Managers' Index (LMI) is a collaborative effort involving Arizona State University, Colorado State University, Florida Atlantic University, Rutgers University, and the University of Nevada, Reno. This initiative is conducted in partnership with the Council of Supply Chain Management Professionals and aims to provide valuable insights into the supply chain industry.

In Conclusion

Overall, December has shown promising signs in the transportation industry with an increase in capacity and a decline in prices. This is good news for businesses and consumers alike as it means more options and potentially lower costs for shipping goods.

As we move into the new year, it will be interesting to see if these trends continue and how they will impact the industry as a whole. With advancements in technology and various labor markets or spot market share factors at play, the transportation sector is sure to experience further changes and developments in the coming straight months.

Stay informed and stay ahead of the game in this ever-evolving industry.

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