The transportation sector responsible for moving raw materials and manufactured goods throughout the U.S. has hit the proverbial ceiling, meaning the freight market cannot get much tighter than it already has without a structural expansion. The national Flatbed Outbound Tender Reject Index (FOTRI) that measures flatbed truck capacity plateaued through April — hovering around 25% after averaging below 15% through most of the first quarter.
Last week the Institute of Supply Chain Management (ISM) reported a sequential decline in the Purchasing Managers Index (PMI), falling well short of expectation. The PMI largely measures manufacturing activity and was expected to expand above a 65 in April, but thanks to supply chain limitations and challenges with employment levels it fell to 60.7.
Flatbed operations are largely centered around but not limited to industrial production and construction activity. The former of which has had a slow and steady recovery, while the latter has had a bifurcation between residential and commercial activity.
As manufacturers come back online, they are finding it more difficult to source raw materials for production. Looking at the components of the PMI, the inventory levels have been contracting at a faster pace through each of the first four months of this year. This component is at the lowest level in index history. Other than surging demand, supply chain constraints upstream have been a big contributing factor.
Imports and deliveries also slowed this past month. Both of these components have a direct connection to transportation and its limitations at the present time. Essentially, manufacturers cannot keep up with demand because their suppliers are not able to get the materials to them.
Another major component in all of this is that employment growth slowed in April. The most recent jobs report showed a huge gap between openings and applications in the workforce. It is difficult to get anything done if the labor is not available.
In the meantime, the backlog of unfulfilled orders continues to grow at a record pace. This is a good sign for transportation providers expecting to see activity over the coming months, but the longer orders go unfulfilled the higher the chances are for cancellations.
Capacity and supply chain expansion do not come quickly. Truck orders are a good example of how hard it is to expand infrastructure. Lengthy order cycles and decision processes mean it will be more than a year in many cases before capacity is added, making rapid responses to expanding markets difficult.
In this circumstance, growth is not just limited by transportation capacity but also goods production. They are connected, though, with one depending on the other in a paradoxical relationship.
The national Outbound Tender Volume Index (OTVI) reflects this ceiling, which appears to be right around a value of 15,700. Tender rejection rates increase at a faster pace closer to this level, meaning that carriers simply cannot keep up with demand. Subsequently shippers do not request much more once it is attained.
The economic recovery could be much more robust, but it is limited by capacity, production and a population that is reluctant to return to work.
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.
SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry in real time.
The FreightWaves data science and product teams are releasing new data sets each week and enhancing the client experience.
To request a SONAR demo, click here.
NOVEMBER 7-9, 2023 • CHATTANOOGA, TN • IN-PERSON EVENT
The second annual F3: Future of Freight Festival will be held in Chattanooga, “The Scenic City,” this November. F3 combines innovation and entertainment — featuring live demos, industry experts discussing freight market trends for 2024, afternoon networking events, and Grammy Award-winning musicians performing in the evenings amidst the cool Appalachian fall weather.