March Supply Chain Sentiment Declines Sharply Amid Inventory Pull-Forward
A monthly survey assessing the sentiment of supply chain managers logged its third-quickest rate of decline in March. Only the early COVID-19 period and Russia’s invasion of Ukraine have triggered more significant shifts in this nine-year-old dataset.
The Logistics Managers’ Index (LMI) fell by 5.6 percentage points to 57.1, marking its lowest reading since August, and a sharp drop since the beginning of the year. Notably, the LMI is a diffusion index where a reading above 50 indicates expansion, whereas one below shows contraction.
“Respondents cited the twin threats of tariffs and inflation as major reasons for pessimistic forecasts,” stated the report on Tuesday. “The drop to 57.1 is concerning, not in isolation, but because it deviates from the previously upward trend seen since July 2023.”
The shift stems from pronounced declines in pricing and cost subindexes, specifically in inventories, warehousing, and transportation. This diverges significantly from January when these were marked well above 70, indicating significant growth.
Supply chains had moved rapidly from January through March, aiming to get goods ahead of evolving trade landscapes. The recent deceleration in pricing is reflective of slowed deliveries as new tariffs are implemented.
Transportation Metrics Revert Previous Gains
Recent transportation datasets show additional cooling in March, wiping away potential earlier gains in the year.
Transportation capacity decreased to 53.6, a 1.6-point drop, while remaining slightly expansionary. Over the past 10 months, this index has largely stayed in the low to mid-50s, dipping just to lows of 50 without going into contraction since March 2022.
Transportation Utilization fell to 54, with a substantial drop in prices down to 56.4 from over 70 in January. This marks the largest drop in transportation prices since July 2022.
A falloff in ocean shipping rates has also impacted the dataset.
Notably, the transportation prices subindex plummeted to 51.1 in the latter half of March from a 60.5 reading in the first half, suggesting an inversion. The report highlights that when subindexes invert and capacity overtakes pricing growth, it can signal a downturn in the transportation market.
“This can be a temporary fluctuation that might correct in April, continuing the positive trend from the last 11 months,” the report speculated. “A prolonged dip may indicate wider economic issues.”
Despite trade uncertainties, respondents still project transportation prices at 64 for the year ahead, albeit 13 points lower than February.
Inventories Were Pulled Forward Ahead of Tariffs … Now What?
Inventory levels grew at a gentler pace, with the subindex sliding 3.6 points from February. Companies across the supply chain pulled forward commodities significantly in January and February, ahead of tariff enactment.
Downstream companies, such as retailers, reported higher inventory levels compared to upstream wholesalers, reversing from February's trends. Meanwhile, inventory costs also dipped 6.7 points with a similar downstream versus upstream disparity.
“This inversion suggests that much of the pull-forward has occurred as firms await new regulatory announcements,” the report indicated. “Companies are wary of overstocking like in 2022 when logistical inflation surged.”
The changes in inventories have affected warehousing metrics, including a 1.8-point increase in warehousing capacity but tightening around downstream levels.
Expectations for warehouse rents are high among downstream companies, contrasting with a more moderate outlook from upstream firms.
The March survey of the LMI panel foresees further supply chain growth, albeit at a tempered expectation of a 60.6 reading, lowered by 5.6 points from February.
The LMI is a concerted effort with participation from multiple universities and the Council of Supply Chain Management Professionals.
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