Issue 31: December 2022 LMI Report, Labor Talks Stall Amid Interunion Dispute & More

A Word from Legacy

It seems as though we were just enjoying sunny skies and warm weather, when suddenly, there’s a chill in the air and the holiday season is just around the corner. Whether you think of this as the most wonderful time of the year or just the onset of winter, there’s one thing we can all agree upon: Now is the time that those of us in the logistics industry spend the majority of the year planning for, and we’re glad it’s finally here.

Let’s kick off this edition of the Legacy Monthly Shipment with our Market Update.

Market Update

LMI Continues Its Descent with a Reading of 57.5 for October 2022

After a slight uptick in September, the Logistics Managers’ Index (LMI) — released on November 1 — has resumed its descent, down 3.9 points to a reading of 57.5. This marks the lowest reading since May 2020; however, the reading is still above 50, which indicates some growth in the industry, largely driven by warehousing and inventory metrics.

Despite some positive economic indicators — including a 2.6% increase in GDP in Q3, a strong dollar increasing U.S. purchasing power and 0.4% growth in consumer spending in Q3 — the logistics industry finds itself in a somewhat precarious position. Core inflation reached its highest level in four decades, and the Fed recently announced plans to increase interest rates by an additional 0.75%, creating economic uncertainty heading into Q4 and early 2023.

Although inventory levels continue to grow, they’re beginning to do so at a reduced rate — the LMI’s Inventory Levels index dropped 6.4 points from September down to 65.5 — as firms dedicate their efforts to running down existing inventories. But despite these efforts, a glut of inventory continues to cause supply chain congestion and a slowdown in transportation.

For evidence of this, look no further than U.S. seaports, which are projected to see a 4.4% decrease in imports year over year for the last six months of 2022 — a stark contrast to the 5.5% growth witnessed during the first half of the year. As the LMI notes, “This disparity lends more credence to the anecdotal stories of firms pulling inventory forward ahead of time to avoid the congestion that flummoxed them in 2021.” This slowdown has also led to a precipitous drop in the cost of containers moving from Asia to the West Coast, down from $20,000 per box to just $2,700, and driven up inventory costs, with the Inventory Costs index reaching a high of 80.9.

Inventory backlogs have a major impact on the warehousing sector, driving costs up and available capacity down. Indeed, the Warehousing Prices index held steady from September, up just 0.5 points to a reading of 75.5, while the Warehousing Capacity index came in at a reading of 44.7, denoting contraction within the space. Despite firms’ best efforts to increase the amount of available storage space, supply has not been able to keep up with demand.

Staffing shortages have further complicated things: According to one survey, three-quarters of warehouse leaders have expressed concern about maintaining productivity levels in their distribution centers. Although automation has lessened some of this burden — current estimates place the total number of industrial robots at 3.5 million units — it’s quickly becoming clear that more human-centric solutions are needed to ensure consistent productivity levels. Workers have responded accordingly, with a growing number of warehouse and fulfillment workers unionizing and staging walkouts in protest of poor working conditions.

There is hope, though, that capacity will ease in the coming months with the U.S warehouse vacancy rate increasing from 3% to 3.2% in Q3. Though the pace of growth will likely be slow, any growth comes as good news, especially for smaller retailers and distributors, which have had to compete with larger firms for available resources. The LMI’s Warehousing Utilization index dropped a substantial 16 points, from 76.8 in September to 60.8, indicating that although the market is still expanding, it’s doing so at a significantly slower rate, which has provided some relief to firms.

Last but certainly not least, we turn our attention to the transportation sector. The Transportation Capacity index reached a reading of 73.1, the highest reading for this metric since the LMI’s inception, which is consistent with the downturn in demand we’ve witnessed in recent months. Mergers and acquisitions have slowed after over a year of significant activity and the transportation job market has lost positions. Transportation prices have entered their fourth consecutive month of contraction, with their corresponding index falling 2.3 points to a reading of 42.2, the lowest for this metric since April 2020. Transportation Utilization has likewise plummeted, down 8.3 points from September to a reading of 61.1.

For a complete overview of the October 2022 LMI across all indices, please refer to the chart below:

Also in Today’s Shipment:

• Chinese officials lock down the manufacturing hub of Guangzhou amidst COVID outbreak
• West Coast labor negotiations hit another snag due to union vs. union dispute
• New survey shows that carriers and brokers expect spot market to find its floor in H1 2023
• Guaranteed delivery dates surpass speed of delivery as leading competitive differentiator

In the News

COVID-19 Outbreak in Guangzhou Leads to City-wide Lockdown

Guangzhou, a major manufacturing hub located in the south of China, locked down more than 5 million residents the week of November 9 following a COVID-19 outbreak that has infected nearly 4,000 citizens. Though not a total shutdown — Guangzhou is the capital of the Guangdong province with a total population of around 19 million — it is an aggressive response from the Chinese government to what is the worst outbreak the city has seen since the start of the pandemic.

The manufacturing operations for many major companies, including Procter & Gamble, Samsung Electronics, Siemens, Nike and Tesla are either based in Guangzhou or neighboring Zhengzhou, which has also been subject to lockdowns due to a spike in COVID infections. Guangzhou is also home to one of the largest ports in the country and is a major transportation hub. Thousands of workers fled the Foxconn Technology Group’s Zhengzhou plant — the largest assembly site for Apple iPhones — following an outbreak, prompting Apple to issue a statement that shipments of the new iPhone 14 model would be delayed due to COVID-related disruptions.

Beyond its economic impact, the lockdown has taken a significant toll on Chinese citizens. Residents of Guangzhou were asked not to leave their homes unless absolutely necessary; schools across the city moved classes online; college students were barred from entering or leaving campuses; flights leaving the city were canceled; and restaurants and businesses closed.

These strict measures are consistent with China’s now (in)famous zero-COVID policy, which had — until recently — been easing in light of public frustration and economic downturn. After initial projections placed China’s annual economic growth at 3.9%, economists have adjusted their forecast down to 3%, among the lowest in decades. And on November 15, protests erupted throughout the streets of Guangzhou, with demonstrators not only decrying COVID policies, but also rising costs of living and food shortages, and clashing with COVID-prevention enforcement officials.

Though it’s unclear whether officials will extend the lockdown even further — it was previously extended to November 13 — following protests, what is clear is that both the residents and the manufacturers that call Guangzhou home are eager for a change in approach to COVID restrictions.

Interunion Conflict Causes Delays in West Coast Labor Contract Talks

One step forward, two steps back — that seems to be the continued cadence of labor negotiations between West Coast dockworkers and their employers, which began in May 2022 and have hit yet another snag. This time, the snag takes the form of a dispute between two unions — the International Longshore and Warehouse Union (ILWU) and the International Associations of Machinists and Aerospace Workers (IAMAW) — over jurisdictional claim of the Port of Seattle’s container terminal.

The latest bone of contention in the months-long dispute is a National Labor Relations Board (NLRB) hearing, which began November 3 and was adjourned until the end of the month due to scheduling issues. Previously, the NLRB had awarded jurisdiction of the terminal to IAMAW, but ILWU contested this ruling in its demands to PMA by asking that its next labor contract specify that the terminal use ILWU workers to maintain and repair equipment. This led to bitter tensions between IAMAW and ILWU, with the latter accusing the former of conspiring with terminal operator SSA Marine to trigger an NLRB hearing and calling upon the White House and Secretary of Labor Marty Walsh to intervene.

The conflict has been a source of confusion amongst shipping officials, particularly because ILWU is responsible for representing all dockworkers — including those within IAMAW — in negotiations with the Pacific Maritime Association.

In addition to the west coast port labor discussions, negotiations between the railroads and various railroad unions also prompted concerns amongst industry groups such as the National Retail Federation (NRF), as retailers struggle to move goods by rail. As of this week, the International Brotherhood of Boilermakers (IBB) union has rejected a national contract deal, and more recently, SMART-TD and the Brotherhood of Railroad Signalmen also rejected the national contract, agreeing to a cooling-off period until Dec. 9th and Dec. 4th respectively, potentially increasing the likelihood of a strike. Any rail strike will have significant repercussions for the shipping of retail and industrial products, projected to cost the economy up to $2 billion per day.

Railroads have warned that they will begin to reduce service while a risk of strike lingers. It is also possible Congress may intervene under the Railway Labor Act, forcing the unions to accept the original negotiated agreement.

“Folks are very concerned about the impact of any self-inflicted disruptions on [the] supply chain and what that would mean and the ripple effect it would have on the economy,” said Jonathan Gold, vice president for supply chain at the NRF, in a statement to the Wall Street Journal.

Although operations at cargo-handling terminals along the West Coast have largely been business as usual, barring a few minor disruptions, shippers remain wary about the outcome of negotiations. As has become a constant refrain with this particular story: to be continued.

Spot Rate Market Expected to Bottom out in Early 2023

Good news for shippers (at least, for now): According to a Freightwaves survey of nearly 400 carriers and brokers, a resounding 44.05% said they expected spot rates to hit rock bottom in Q1 2023, and an additional 25.57% said Q2 2023. Results from the National Truckload Index Forecast (NTIF), a 30-day forecast based on historical rates, imports, wholesale fuel prices and contract rate data, projects that spot rates will sit around $2.45 by the middle of December.

Months of high fuel prices and equipment costs, reduced consumer and industrial demand and plummeting spot rates have left carriers on edge, worried that these factors could prove an ill-omen for contract rates.

As Freightwaves reports:

“For most of this year, tendering freight to the spot market has been dramatically cheaper than contracted freight, but that reality won’t hold forever. The spread will naturally start to narrow, as contract rates are bid lower to better reflect the spot market. The percentage of contract freight and compliance should decline. If this starts happening, more freight will be shifted to the spot market, changing the balance between load volumes and truck capacity.”

Given the circumstances, carriers are understandably hopeful that spot rates will rebound in the second half of 2023 but, until then, dwindling spot rates bode well for firms looking to make one-off shipments and those that require more capacity than currently contracted.

Scheduled Delivery Becomes Leading Differentiator in eCommerce Market

Move over, same-day and next-day delivery — there’s a new sheriff in town. As we rapidly approach the holiday season, we’re seeing a growing contingent of online shoppers prioritize guaranteed delivery dates over fast shipping, citing reliability, visibility and cost as motivating factors.

According to a Circuit consumer survey, shoppers indicated that timely delivery is a top priority for them — even over fast delivery — with 73% saying that they would order more frequently from a company following an early or timely delivery. By that same token, 66% said that they would stop ordering from a company following a late delivery (though that comes as less of a surprise).

For consumers, the ability to schedule deliveries and receive guaranteed delivery dates eliminates much of the stress typically associated with rapid fulfillment — namely, wondering whether their next-day shipment will actually arrive the next day. It also offers consumers more visibility than previously possible; for example, if a shopper were to schedule a delivery within a day or two of their purchase, they can assume that the product was likely fulfilled from a local warehouse or distribution center.

Retailers also benefit from this arrangement. Those that have already introduced this option, such as Saks Off 5th, have been able to charge a premium for same-day or next-day delivery, giving consumers the illusion of cost-savings when they choose to schedule deliveries. It also eliminates some of the pressure of rapid fulfillment, allowing for more reliable performance and better utilization of delivery resources.

As with most major shifts in the eCommerce market, we can thank Amazon for this trend.

“While Amazon drove the need for next-day delivery, it is not really possible to do that across 100% of their stock, because of proximity of goods to consumers,” said Rick Watson, founder and CEO of RMW Commerce Consulting, in a statement for The Loadstar. “I think, while Amazon has the best next-day capabilities, it will also continue to push consumers with incentives to optimize its fulfillment network, and its own costs. At the end of the day, the more things in the same box and the higher density routes they can run, the more profitable it will be.”

Thank you for joining us for this month’s Shipment — we’ll be back next month with even more of the latest logistics trends and news stories. Until then, check out our blog and resource center for more information, or reach out directly to the Legacy team with any questions you might have.

We’ll see you soon.