Economist examines state of inventories at SMC3 Connections conference

While concerns regarding the state of the freight economy—and if a freight recession remains intact—have been chief concerns for freight transportation and logistics, that has subsequently led to the question of if an inflection point in the freight market has been reached.

At last week’s SMC3 Connections conference in Colorado Springs, Co., Keith Prather, Managing Director, Armada Corporate Intelligence, assessed the current state of the freight economy, coupled with a look at where things may be heading, too.

“Over the last 18 months, there has been a lot of talk about if we are in a freight recession,” said Prather. “But we have had really strong economic growth. We see GDP growing 2%-to-3% and products being sold and consumer spending being very good. It sort of defies how we should be thinking about the freight sector and freight demand. We should be seeing it going in the opposite direction. But what we find is if we go back multiple decades, and just watch inventory-to-sales ratios, that really has a major impact on whether we are moving freight or not.”

When looking at inventory-to-sales ratios, Prather stressed that they are typically viewed at a “high level,” for things like total business, manufacturing, retailers, or wholesale trade. But he cautioned that is not enough, because one needs to take a deeper look at individual sector indices, especially when it comes to the less-than-truckload (LTL) sector.

“When we think about LTL, every one of those markets moves our business,” he said. “If highly focused in one area, your business is going to be way more robust than it is if it's in another concentration.”

Looking back at his SMC3 JumpStart presentation in Atlanta in January, Prather said that heading into 2024, it felt like inventory-to-sales ratios, for the first time, would be balanced. Prior to that, though, he observed that inventory-to-sales ratios started “getting out of whack” in September 2022. And going back to the global supply chain crisis in 2021 and 2022, many purchasing managers ordered two- or three-times as much inventory than what was really needed, with the hope that one of their suppliers would ultimately be able to fill an order, whereas ultimately all orders were filled, creating an overstock situation.

“We saw this inventory surge in the fourth quarter 2022, and historically it takes about 18 months for that to unwind,” said Prather. “It looked like, at that point, that by mid-year this unwinding would start to take place.”

Based on Armada’s data, Prather said that around 31% of inventories are understocked going into Peak Season and are sitting lighter than they were the entire decade heading into the pandemic.

“Looking at general merchandisers like Walmart and Target, and others that inbounded a ton of freight for the peak, they are sitting almost 11% lower than they were prior to the pandemic,” he said. “They are in a position where they can go back and focus on continuous replenishment. The only thing that's limiting them at the moment is how they're forecasting demand, and what they see for demand, and how lean they want to come out of the Peak Season going into January.”