U.S. Business Spending on Logistics Drops by 11% in 2023 Amid Normalizing Supply Chains

According to the ‘State of Logistics’ report released by the Council of Supply Chain Management Professionals (CSCMP) yesterday, and in a significant development, U.S. business spending on logistics services declined by 11% in 2023, amounting to USD 2.4 trillion. This reduction hints at stabilized supply chains after a long tryst with the pandemic and the following extensive disruptions.

However, despite the decline, logistics costs remain relatively high in the country, having surged by 22.4% in 2021 and nearly 20% in 2022 from a pre-pandemic baseline of USD 1.5 trillion. A noteworthy metric from the report is the ratio of business logistics costs to nominal U.S. GDP, which was 8.7% last year, down from 9.1% in 2022 but still above the 7.7% recorded in 2019. Historically, this ratio only exceeded 8% once between 2012 and 2019, indicating a shift towards greater logistics efficiency in the past.

Compiled by Kearney, the report emphasizes, as increasingly realised by logisticians, that volatility is a persistent feature of modern supply chains. This recognition underscores the importance of developing robust and flexible transportation and warehousing networks.

The report highlights that many shippers and logistics service providers have yet to invest adequately in technology and assets that can mitigate disruptions. Examples include longer transit routes to avoid geopolitical conflicts and adapting to environmental challenges such as low water levels in critical canals.

Freight demand was relatively weak throughout 2023, with a slight uptick in ocean and air volumes during the fourth quarter driven by e-commerce activities. This subdued demand coincided with an oversupply in transportation and storage capacity, leading to lower cargo rates. However, the report projects a tightening of capacity and potential rate increases by the second half of 2024, a trend already observed in the air and ocean freight sectors.

The trucking industry faced a particularly challenging year due to an oversupply of capacity and declining volumes, leading to significant rate reductions. Although over 1,000 truck brokers went out of business, the number was lower than anticipated due to the substantial profits many accrued in the previous two and a half years.

The report also suggests that until there is a resurgence in retail and business inventory rebuilding, improvement in consumer sentiment, and a more favorable housing market index, coupled with potential rate cuts by the Federal Reserve, the balance of power in the logistics sector will likely remain unchanged. Trucking prices might begin to recover late in the fourth quarter of 2024 or in early 2025.

The parcel market experienced declines, with a 7.4% drop in domestic volumes at UPS, and Amazon surpassing FedEx and UPS in total U.S. deliveries in 2023. Large shippers have diversified their carrier bases and optimized their rate-shopping strategies in a complex pricing environment.

Rail traffic saw a year-over-year increase, yet revenue for Class 1 railroads fell by 2%, resulting in an 11% drop in operating income. The modest rise in volumes was attributed to carload traffic, as intermodal volumes fell by 6%. However, the intermodal outlook is positive due to the increased relocation of manufacturing operations to Mexico.

The CSCMP report corroborates other data indicating that buyers of freight services currently hold a stronger negotiating position. Nevertheless, this could shift as capacity tightens. Recent surges in air and ocean volumes, despite being the traditionally quieter season, suggest many companies are preemptively ordering to avoid supply chain constraints ahead of the holiday rush.

Ocean freight demand now exceeds available equipment and vessels, partly due to rerouting around Africa, leading to vessel congestion and elevated container rates. Current trans-Pacific and Asia-Northern Europe rates are significantly higher than both seasonal norms and historical figures, reflecting the intensified demand and logistical challenges.

Additionally, high inventory levels, although starting to normalize, indicate that companies are now ordering more from overseas as they deplete their pandemic-era stockpiles. Future demand for logistics services remains uncertain, with global macroeconomic forecasts predicting weak growth through 2030. However, potential disruptions from geopolitical, environmental, or labor issues could alter this outlook.

An emerging trend highlighted in the report is the commercialization of in-house logistics operations by ultralarge shippers like Amazon and Pepsi Logistics Co. These companies are leveraging their logistics capabilities to offer services externally, including advanced offerings such as drop trailers and truck fleet management, driven by surplus capacity within their networks. This strategy allows them to manage fleet electrification and improve driver retention, adding strategic value beyond immediate logistics needs.

The convergence of logistics services is blurring the lines between asset-light brokers and asset-based carriers. This trend sees brokers investing in assets like drop-and-hook trailers, while traditional carriers expand into brokerage and freight forwarding. However, achieving the necessary scale and expertise to succeed in these integrated models poses significant challenges, especially in a high-interest-rate environment that complicates investment in logistics technology and infrastructure.

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