November 2023 Logistics Managers’ Index released

As with every report chronicling the month of November, we should begin the discussion with “Cyber Week” – the five-day period between Thanksgiving and Cyber Monday that has often functioned as the true kickoff to holiday spending. According to the National Retail Federation 200.4 million shoppers made purchases between Thanksgiving and Cyber Monday. This was significantly higher than predicted turnout. Consumers spent $12.4 billion on Cyber Monday and $38 billion in online sales across Cyber Week which is up 7.8% from 2022[1]. The jump in sales at the end of the month is a potential explanation for the increase in activity we see in the second half of November. The increase did not only come from ecommerce, as physical retail store traffic grew as well, up 1.5% from 2022[2]. Electronics, apparel, furniture, groceries, and toys led the way, accounting for 60% of all consumer spending in November[3]^,[4]. One interesting note on the spending is that the use of “buy now pay later” providers and eschewing the use of the store credit cards which had previously been so lucrative for retailers. This shift in the use to the type of credit consumers are using is likely partially due to the changing demographics of shoppers, with younger spenders less drawn to high-interest cards for multiple stores when compared to previous generations.

This wave of spending comes after consumer spending was only up 0.2% in October, which was the slowest increase in spending since May – which is one of the reasons Inventory Levels had built up last month. The low spending was a major contributor to the continued slowdown of inflation[5]. This dip was also reflected in the San Francisco Fed’s measure of inflation factors, which showed demand as being deflationary in October, the first time since January 2022 when consumers first started stepping back from the record spending of 2021[6]. The Fed is not ready to say that they are through raising interest rates. However, given the continued improvement in their preferred inflation metrics, it seems unlikely they will raise rates at their December meeting. Whether or not this is indicative of an eventual reduction in rates remains to be seen[7]. If consumer spending is muted through the end of the year, a rate reduction may enter into the realm of possibility. Markets seem to be expecting this possibility. In the U.S., the Dow rose for the fifth consecutive week at the end of November which marks its longest period of expansion since 2021. The S&P 500 and Nasdaq have increased over the last five weeks as well as investors grow more hopeful of a slowdown in interest rates[8]. LMI respondents are optimistic about growth in the logistics industry over the next 12 months. For that growth to occur it is likely that the predicted relaxation in interest rates will have to have happened first.

Despite the dip in the overall LMI (-7.1) to the very mild rate of contraction of 49.4, the North American economy continues to chug along. The “earnings recession” that U.S. firms had been mired in seems to have ended. Earnings had been down since Q4 of 2022 but rebounded in Q3 2023 with corporate profits reaching a total of $3.28 trillion – just shy of the all-time record of $3.3 trillion set in Q3 of last year[9]^,[10]. However, as has been the case through most of 2023, this recovery is not consistent across the globe. The slowdown in the Panama Canal is sending fuel prices skyrocketing in Asia as the LPG carriers are being given last priority (behind passenger and cargo ships) to get through the canal[11]. This could potentially lead to inflation in Asia this winter as heating becomes more expensive. This would be particularly unwelcome news for China, which is already struggling due to low consumer demand fueled by their faltering real estate market and continually contracting factory activity[12]. Sailings through the Panama Canal will be restricted through at least February. High fuel prices for the world’s second-largest economy could potentially have ripple effects around the world. Conversely, the economic situation in India continues to improve, as inflation has eased, and demand has continued to grow for the country that now has the largest population in the world[13]. How this growth might be impacted by slowdowns in the Panama Canal remains to be seen. Another byproduct of the issues with the Panama Canal is more freight shifting back to the Pre-Covid pattern of coming in through West Coast ports, eschewing the Gulf and East Coast ports that had seen a spike in activity over the last few years. This has led to a reversion of volumes, with places like the Atlanta market down 11% year-over-year but Ontario California up 14%[14]. This overloading of freight to one side of the country is less of an issue now when capacity is high. However, as supply and demand move back towards equilibrium, the geographic concentration of freight could lead to issues with cost on the West Coasts, and availability in the East.

As mentioned above, much of the decline in this months’ LMI is attributable to shifts in inventories. Inventory Levels are down (-9.1) to 44.3, putting them squarely back into contraction territory after a one-month reprieve. This is consistent with anecdotal inventory reports. Several large retailers including Dick’s, Walmart, and Target have purposely kept inventories low. Target epitomizes this strategy as their inventory was down 14% year-over-year at the end of Q3[15]. This seems to be further evidence for the move towards JIT strategies that we have discussed for the last several months in this report, as well as an explanation for the declining inventories we saw in November. Retail sales are expected to be up slightly in from last year, so it remains to be seen whether the cuts to inventory were too deep and will lead to missed sales, or if they are exactly what the doctor ordered after the inventory boondoggle many firms faced in 2022. Perhaps tellingly, Downstream retailers are looking to keep Inventory Levels low at a level of 41.5 over the next 12 months, while their Upstream counterparts look to be somewhat aggressive in building inventories back up at a level of 54.7. It will be interesting to see how inventories are affected some large retailers turning towards AI to determine inventory levels. The swift adoption of this technology is at least partially due to the unprecedented swings baked into the historical sales data over the last few years, making classic historical forecasting techniques somewhat unreliable. The hope is that AI generated forecasting will also make planning more dynamic and help companies to avoid disruptions[16]. An additional reason for firms to be aggressive in adopting cognitive technology is to bring down Inventory Costs, which though down (-7.6) continue to increase at a rate of 62.1 and have still never contracted.

Perhaps the primary reason that Inventory Costs continue to rise in spite of declining Inventory Levels is the continued tightness in the warehousing market. Warehousing Capacity did move up (+3.6) to 60.6 in November, but the increase capacity was not enough to sate the continuous growth in the cost of storage. While space has come online, there is still not enough square footage of the fulfillment space in urban areas that will allow for the efficient last-mile delivery consumers crave. Firms are taking several different approaches to dealing with this lack of space. Walmart will add parcel stations to 40 of its stores across nine states by the end of 2023. The purpose of these stations is to facilitate last mile delivery, relieving pressure from their warehouse and distribution network[17]. Similarly, in mid-November Walgreens announced a plan to pivot towards fulfillment out of their brick-and-mortar stores. While this has been tricky for other large retailers, Walgreens hopes that their dense network of stores – of which one is within 5 miles of 78% of all Americans – will allow them to increase service levels and decrease shipping costs[18]. Even social media platform TikTok is getting in on the act, committing significant resources to new logistics functionalities to bolster the ecommerce sales that drive their revenue stream[19]. It is no coincidence that it is large retailers who are taking these significant steps. While Warehousing Utilization is still growing at a rate of 52.9, it is down significantly (-14.0) from October’s reading. However, as with many aspects of the logistics industry, this decline is not uniform. The slowdown in the expansion of utilization was largely driven by a slight contraction by Upstream firms (48.8). Conversely, Downstream firms (which would include the retailers discussed above) are reporting continued expansion in Warehousing Utilization at 59.8. The lack of the appropriate space is represented in Warehousing Prices (-6.5) which continued to increase in November at a rate of 64.2. The high cost of space will likely continue to be an issue across the supply chain going forward, Warehousing Prices are predicted to continue steadily increasing by both Upstream (62.1) and Downstream (69.7) respondents. The rate of expected growth for respondents is nearly 70.0, which we classify as a significant rate of expansion. Clearly, our respondents are expecting 20024 to be another strong year for the warehousing market.

There is also optimism regarding transportation. However, unlike warehousing, the predicted growth in transportation is only hypothetical, and has not yet been realized at all levels of the supply chain. Transportation metrics are down overall but remain strong at the Downstream retail level. For instance, overall Transportation Utilization is down considerably (-10.7) to 50.0 – indicating no movement – when we only consider the macro level. However, if we drill down we find that Upstream firms reported contraction (47.9) while their Downstream counterparts saw continued expansion (55.1). The increased activity Downstream is exemplified by Amazon, which surpassed UPS to become the largest parcel carrier in the U.S. last year, announcing that they had delivered 4.8 billion packages before Thanksgiving. They are projecting total deliveries of 5.9 billion parcels by the end of 2023[20], suggesting that nearly a fifth of their annual volume will move over the next month. UPS may be making up some of the volume on the reverse side, as signaled by their agreement to acquire Happy Returns from PayPal[21]. Returns often peak right after the holidays, and the reverse play could be successful for UPS going into 2024. As exemplified by the extreme lack of enthusiasm shoppers are showing to the retailers who are trying to normalize paying for returns[22], reverse logistics and the associated transportation that goes along with it is very likely to continue growing for the foreseeable future.

Similar to what we saw with utilization, Transportation Prices are down (-0.2) overall to 44.2. This is the first slowdown in this metric since May – although it should be noted that outside of October’s reading of 44.4 it is the highest score for this metric in over a year. Once again, we see a notable difference between Upstream (41.5) and Downstream (50.0) respondents. While prices did not increase Downstream, they did hold steady after October’s growth, and were much higher in the second half of November once last-mile deliveries for holiday goods picked up. If regular seasonality holds, we are likely to see higher Downstream activity continuing through December while their Upstream counterparts remain slow until the new year. Whatever the case ends up being, there will be plenty of Transportation Capacity, which is up (+5.2) to 61.8 in November. Unlike the other two transportation metrics, Transportation Capacity is growing faster Downstream (65.4) than Upstream (59.9). Trucks are easier to build than warehouses, and it seems that the capacity that will be needed to facilitate ecommerce growth moving forward is ready in a way that the fulfillment centers are not.