Production levels suggest that demand will not be a concern in early 2025
Chart of the week Logistics manager index – inventory levels SONAR: LMI.INVL
Logistics Manager Index (LMI) which measures the level of inventories in December was 50, indicating that total inventories were flat compared to November. This indicates that companies have correctly predicted the holiday demand. However, a closer look reveals a disparity between upstream and downstream storage that suggests significant freight movement opportunities in early 2025.
At the most recent Freightonomics podcast, Dr. Zach Rogers from Colorado State University highlights the strong distinction between upstream and downstream activities in an aggregate supply chain.
“Up” in this context refers to inventory of finished goods that are not expected to be sold for an extended period of time. These facilities are mostly located away from the primary consumer. Major port warehousing centers are located near port cities such as Los Angeles (commonly referred to as the Inland Empire) and Savannah, GA. In recent years, cities such as Phoenix, AZ and Laredo, TX have seen accelerated growth in such facilities due to real estate and proximity to US import gateways.
In contrast, downstream facilities closer to end users have expanded and evolved to handle higher consumption rates at a faster rate. These facilities are generally referred to as distribution or fulfillment centers.
Dr. Rogers noted that upstream facilities showed modest inventory growth in December, which registered 57.9 on the LMI. Readings above 50 indicate expansion, while those below 50 indicate contraction. Conversely, downstream retailers scored a staggering 33.9, indicating a very successful holiday shopping season for many companies.
The bottom line is that firms over-ordered in response to threats such as tariffs, while downstream firms underestimated customer demand. As a result, many downstream companies have They will spend early 2025 replenishing their inventory.
It is plausible that some retailers are aiming to reduce inventory in the wake of rising warehousing costs. Since the index’s inception in 2016, the LMI’s warehouse price component has never fallen into contract. Distribution and fulfillment centers are especially expensive to operate.
However, this argument is flawed: these facilities do not cost less when they hold less inventory, and the loss of revenue opportunities due to insufficient inventory is more expensive than warehousing. Furthermore, exporters do not seem to reverse their import activity, which contradicts the cost control theory.