March supply chain data craters following inventory pull-forward

A monthly survey of supply chain manager sentiment logged its third-fastest rate of decline in March, with only an early-COVID reading and Russia’s invasion of Ukraine triggering bigger moves in the 9-year-old dataset.

The Logistics Managers’ Index fell 5.6 percentage points to 57.1, the lowest reading since August and a significant step down from the first two months of the year, which provided the highest readings since June 2022. (The LMI is a diffusion index in which a reading above 50 indicates expansion while one below 50 signals contraction.)

“Respondents indicated that the twin threats of tariffs and continued inflation were significant contributors to their pessimistic predictions,” a Tuesday report stated. “The dip to 57.1 is not troubling in a vacuum, the major point of concern is that it represents a deviation from the direction in which the logistics industry had been trending since reaching a low point in July 2023.”

The change was triggered by sharp declines in all three pricing and cost subindexes (inventories, warehousing and transportation), a stark change from January when the readings were above 70, which the report classified as “significant growth.”

Supply chains moved at a quick pace in January, February and early March to get goods in ahead of a changing trade landscape. The recent slowing in pricing growth is reflective of a slowdown in deliveries as tariffs have been implemented.

Several new tariffs on goods imported into the U.S. are slated to take effect on Wednesday.

Transportation metrics cough up recent gains

The transportation datasets showed further cooling in March, erasing what appeared to be a potential breakout to begin the year.

Transportation capacity (53.6) was down 1.6 points sequentially but remained slightly in expansion territory. The index has hovered in the low to mid-50s over the past 10 months, twice hitting lows of 50 but not dipping into contraction since March 2022.  

Transportation Utilization (54) was down 3.8 points, with prices (56.4) falling 9 points after recently topping 70 in January. January marked the highest reading for prices since April 2022 – the onset of the freight recession. March marked the largest drop in transportation prices since July 2022.

A falloff in ocean shipping rates is also weighing on the dataset.

Notably, the transportation prices subindex plummeted to 51.1 in the second half of March from a 60.5 reading in the first half and fell below the reading for capacity, “indicating a slight freight inversion.” The report said the transportation market usually experiences a downturn when the subindexes invert and capacity growth outpaces pricing growth.

“It is possible that this is a one-time blip that will flip back in April and that the market will continue the positive trend it has demonstrated over the last 11 months,” the report said. … “If we see a sustained pullback in freight, it may signal coming issues in the overall economy.”

Even with uncertainty around trade, respondents still returned a one-year-forward expectation of 64 for transportation prices, though that was 13 points lower than in February.

Inventories were pulled forward ahead of tariffs … now what?

Inventory levels (61.2) grew at a slower pace with the subindex declining 3.6 points from February. Companies at different levels of the supply chain significantly pulled forward commodities and goods in January and February ahead of tariff implementation.

Downstream firms like retailers reported higher inventory levels (66.7) than upstream wholesalers (58.9), a trend reversal from February. Inventory costs (70.6) were down 6.7 points in the month with a similar spread between downstream and upstream companies.

“This inversion suggests that the bulk of the pull-forward may have happened already, with firms now waiting to see exactly what the new regulations will be,” the report said. “Many firms are in a difficult position because they want to build up inventories quickly to stay ahead of tariffs, but at the same time they are nervous to build inventories up too much as it could lead to a repeat of some of the problems of 2022 when firms were bogged down by goods and supply-inflation spiked.”

The change in inventories continued to move warehousing metrics.

Warehousing capacity (52.3) increased 1.8 points but tightened downstream (47.9) as goods initially delivered upstream have moved closer to the consumer. Warehouse utilization (59.7) fell 5.8 points sequentially, with prices (61) plummeting 16 points.

Asian 3PLs and e-commerce companies have been actively procuring space in the U.S., propping up demand in an otherwise down market.  

Downstream companies are now expecting a surge in warehouse rents over the next year, returning a reading of 81.3 compared to upstream firms, which expect more steady rent growth (61.4).

The March survey showed respondents expect further supply chain growth, returning a one-year-forward reading of 60.6, 5.6 points lower than the February expectation.

The LMI is a collaboration among Arizona State University, Colorado State University, Florida Atlantic University, Rutgers University and the University of Nevada, Reno, conducted in conjunction with the Council of Supply Chain Management Professionals.

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