Trucking Capacity Declines: LMI Shows Shifting Trends

Speaker 1 [0:08] So, for today’s Sonar update, August 5th, Wednesday, I want to talk a little bit about the overall market and then about the new LMI report that just came out. So, overall market truckload rejections, our STRI.US index, has fallen a bit to just below 14%. We’re at 13.84%. Yeah. Tender rejections, which is down 2.74% month over month. However, when you compare it to prior years and normal seasonality for late July, early August, we’re still extremely elevated from what we have seen over the prior few years. We’re seeing the same for NTI for spot rates, that NTI USA is down to $3.47, which is down about 7.5% month over month. However, again, very normal seasonality and still extremely elevated compared to the last 3 years. The other thing that I want to call out is that truckload contract rates are VCRPM1.usa, which is currently sitting at $271 plus fuel, is still up 18% year over year. So it stands to reason that as contract rates rise, mini bids and new bid cycles are executed, that routing guides are standing up, more contract freight is being accepted at those newly agreed-upon increased contract rates, which then causes those tender rejections to normalize a bit and fall. So again, everything that we’ve said in July remains true for early August. I do believe that as we get into the last week of August, we will see capacity continue to tighten with road check and other safety enforcement going on, as well as leading us into what I believe will be more of a normal peak season as we head into the fall. I also really want to talk about our— the new LMI numbers. We’ll get significantly deeper into this on the second half of the show on Thursday for the Freightonomics segment, where we will have Dr. Zach Rogers on with Zach Strickland to talk about this. But the July numbers are out. The LMI overall number for July is 68.9%, which is down about 2 points from June where it was at 71.7%. However, the projected direction is expanding, but the rate of change is slower than what we have seen. Inventory levels are also down to 55 from June where they were at 60.5%. However, the projected direction is expanding and expanding at a faster rate of change. With inventory levels continuing to fall, we should see a restocking and replenishment at some point going in again to a normal peak season and into fall. Inventory costs were up about a point. In June, they were 75.9, up to 77 in July, with that direction still expanding. Warehousing capacity was down about a point as well, from 47.5 in June to 46.3 in July. Warehousing utilization also down about 3 points, from 69.4 to 66.7. 73.1 in July, while warehousing pricing is still rising. It showed 73.8 in June and is up to 75.5 in July, with that direction showing as expanding and the rate of change as faster. Transportation capacity also fell from 30.8, down about 2.5 points to 28.4, and showing that direction of change as contracting. So, capacity continuing to contract and at a faster rate. Transportation utilization was down the most significantly of all of the numbers from 74.7 in June down to 65 in July, with that direction of change showing as expanding and the rate of change showing as slower. Transportation pricing did fall, which is right in line with our NTI and what we just discussed, from 92.4 to 86.9. However, the direction, the projected direction is expansion, but at a slower rate. And then the aggregate logistics costs also fell slightly from 242.1 in June to 239.5 in July. However, that projected direction is showing as expanding but slower. So overall, again, that July LMI number is 68.9. That’s the Logistics Manager Index. The average for the last 3 readings was 69.8. So we’re just slightly below that by 1 point. The all-time average is 61.7 with a high of 76.2 and a low of 45.4. So when you still think about that overall average as well as that low, we’re significantly above that. All indicators of a pretty healthy freight Again, we’ll dig into the details a bit more on this tomorrow, but wanted to go ahead and get those numbers out and in front of you all. Again, you can access all of this LMI data directly in Sonar as well as accessing the full report directly from the Logistics Manager Index. But the executive dashboard in Sonar gives a really nice, quick, clean snapshot as well of each month’s numbers.

Speaker 2 [5:33] So, Julie, another great report just showing how tight this freight market is and really inventory levels. What’s interesting That inventory levels, I think, are dropping a bit in terms of just the overall level in terms of inventories aren’t building as much. And it’s sort of, if you go to Gene Seroco, like what his comments were, that retailers are pretty bullish on the second half. I mean, any thoughts on that?

Speaker 1 [6:02] Yeah, I think that people were hesitant to see what was happening in this cycle. But now I believe that there’s gonna have to be a replenishment in those inventory levels.

Speaker 2 [6:12] Yeah, it says expanding. Those inventory levels according to the LMI are actually dropping. I think that’s an incorrect statement.

Speaker 1 [6:19] It says expanding there. It says the projected direction will be expanding.

Speaker 2 [6:22] Ah, projected direction, okay. But it dropped.

Speaker 1 [6:23] So it dropped from 60.5 to 55. So it dropped a little over 5 points.

Speaker 2 [6:29] 5.5%, yeah. But the projections are it will expand in the future.

Speaker 1 [6:33] It will expand.

Speaker 2 [6:33] Okay, got it. I mean, it makes sense. You’re going to the holidays.

Speaker 1 [6:36] And rents are still up, right? You’re going to the holidays.

Speaker 2 [6:39] And so you’re gonna naturally have more inventory as buffer to kind of manage your inventory out of stock. But look, I think when you listen to Gene Seroka, his statement was that robust container volumes that we’ve seen earlier in the year, he believes are gonna continue all the way through the end of the year, which tells us a lot about the sort of the bullishness of retailers.

Speaker 1 [7:01] Yeah, and I’m sure they’re gonna dig into the details a lot more tomorrow with The Zachs on the LMI on the back half, but—

Speaker 2 [7:09] We have Zach Rogers, who is one of the authors of the Logistics Manager Index that comes on Freightonomics with Zach Strickland. He’ll be here tomorrow to talk about what they read into the— what does this report say? What does it mean for supply chains? What does it mean for freight markets?

Speaker 1 [7:26] Yeah, but I would be curious to see if we placed July over July, right? And look at that—

Speaker 2 [7:31] You mean a year-over-year basis?

Speaker 1 [7:32] Yes.

Speaker 2 [7:32] Yeah, just in terms of sentiment.

Speaker 1 [7:33] But there’s probably always some contraction, right, in July compared to—

Speaker 2 [7:38] I think it’s important to remember last year, we had all of the noise around Liberation Day tariffs. We were still not out of the woods. There was the fact that the China tariffs had been significantly increased. And then sort of a— I think at that point last July, we had a 10% tariff on Chinese goods, because I think Trump paused them. There was the threat of them going back on August 1st if we didn’t get negotiation. That noise is gone this year. We’ve had some noise around tariffs, but not like we had last year. Plus, you’ve got this resurgence in the industrial economy that wasn’t playing out last year, really didn’t kick off to November. We’ve heard that from the railroads. We’ve heard it from just everybody that’s in that industrial sector who has exposure to it, has talked about the fact that this year has been strong. And you have the ISM data that also reaffirms that.

Speaker 1 [8:30] Well, I think also putting this in perspective, we saw the LMI go down 2 points. But if you put this into perspective, the all-time average is 61.7, and we’re still at 68.9, right?

Speaker 2 [8:43] Well, now that is the composite. That is the composite. It is interesting because transportation prices according to the LMI, or at least the momentum is cooling. Aggregate logistics cost is cooling. So where the LMI is lowering just means some of the pressure on shippers, the continued momentum is cooling. Plus oil. And if we remember, if we go back a couple of months ago, we were in the peak of oil prices, hit $115 a barrel. There was some narrative out there that oil could go all the way to $200 a barrel, the moon, it would crater the economy. Didn’t happen. Seems like every weekend we go through this period where this threat of, we start on Friday, we’re going to have more attacks on the Iranian regime, and then by Sunday it’s like, nope, pause. I think the president, the administration is very sensitive to how financial markets react to it, which is why there’s a lot of posturing over the weekend and then sort of cooling off of relations. We’re always going to get a deal, it feels like, every Sunday. Yeah, pretty predictable at this point.

Speaker 1 [9:50] And I think that this is, again, a normal July. We still are significantly elevated above where we have been, even in the places where it’s contracted. And I think the reason that this is going to remain is capacity is not going to continue entering the market. We’ve talked about it. Probably not.

Speaker 2 [10:02] And speaking Speaking of capacity, there is a— Department of Transportation has this thing called Operation Highway Shield. What is this, Julie?

Speaker 1 [10:12] Okay, so it’s a federal really trucking crackdown where the Department of Homeland Security is partnering with FMCSA and the DOT to do some additional really crackdowns on the interstate. So it started in Florida. And then they just had kind of a 3-day blitz at the end of July, primarily through the Midwest in a coordinated effort. And not that it was a ton of capacity that was taken out. They said more than 750 unsafe trucks or drivers were pulled from the road. 51 people were detained on immigration violations. They found 36 English language proficiency violations, saying that they were really focusing on—

Speaker 2 [10:52] Is that Joffrey? But wait, was that? No, that was Derek Barnes in his outfit. Did you see that?

Speaker 1 [10:57] Oh, I wasn’t watching.

Speaker 2 [10:58] There he is, chief cop on the roads. And look, this is, I think, like the DOT blitz. It’s just another— are they trying to do these periodic blitzes?

Speaker 1 [11:08] Yes. And I think that the interesting part is that they’re working together to do it, right? They’re working with the states. They’re working across the different federal agencies to do this. So I think what it shows is there’s going to be continued regulation. It’s not going anywhere. There’s going to be a continued push for improved safety on our highways, which is going to create more barriers to entry and is going to create continued capacity leaving the market. It’s also going to create emotion around capacity leaving the market, which is, in my opinion, going to continue to push spot rates.

Speaker 2 [11:39] Yeah, for sure.