DOES THE INVENTORY CYCLE MEAN A V-SHAPED RECOVERY?
From Bloomberg:
Companies in the U.S. are slowing the pace of inventory reductions after a “dramatic” drawdown, setting the stage for a surge in stockpiles that will strengthen economic growth this quarter, say economists at Oscar Gruss & Son Inc.
“We’ve just started to form a V, and we expect it to extend up sharply,” said Michael Shaoul, chief executive officer at New York-based Oscar Gruss. “Businesses had been just very traumatized and nervous about a decline in demand, and they’re starting to get over that. We have every reason to believe that economic growth is going to get stronger from this point on.”
The CHART OF THE DAY shows the turning point in business inventories. While stockpiles continued to drop from July to September, the reduction of $130.8 billion at an annual pace was smaller than the record decrease of $160.2 billion in the second quarter. The smaller decline contributed 0.94 percentage point to growth last quarter.
With inventories running lean, manufacturers will boost production as demand stabilizes. That makes it likelier they will start hiring again.
“We have a turn in the process, and it’s going to drive improvement in other economic metrics,” Shaoul said. “As businesses start to rebuild inventories, they’re going to have to go out and hire more people,” he said.
The economy expanded at a 3.5 percent annual pace in July through September, the Commerce Department said yesterday, snapping four straight quarters of contraction.
In the manufacturing ISM report, new orders have indicated growth for 3 straight months, though growth has slowed in September from the previous month. Production has shown growth for 4 straight months, though like new orders, September slowed from the previous month.
http://www.ism.ws/ismreport/mfgrob.cfm
The ISM report indicates that inventories are considered too low, as they have for many months. For each month, June – September, inventories have contracted, but at a slower rate each month.
Growth in production/new orders are underway to the extent that inventories are no longer contracting as much as the previous month. Still inventories are contracting.
Question: does an anticipated rise in future demand/sales require continued growth in production/new orders – to the point where inventories are no longer contracting? As indicated at the top, growth slowed from the previous month for both production/new orders. Does this hint at the possibility that inventories have reached a level meeting anticipated future demand? A few more months of data will be needed to demonstrate if this is the case.
On the other hand, does the data suggest that increased production/new orders should be anticipated to the point where inventories are eventually adequately restocked, a restocking which itself suggests that a rise in future demand is anticipated? The economist quoted in the above news story considers the last four months as clear evidence of the this.
If this is the case, and clearly one can make such a case with credibility, then this suggests that the rise in new orders is due to more than inventory restocking and goes beyond that, that is to meet future anticipated demand. In this respect, is there evidence of growth in retail sales and consumer demand sufficient to support this assertion? In this regard, what does the data from other reports indicate.
The Fed’s Economic Indicators indicates the following: a recent and slight uptick in sales, as shown in Inventories and Business Sales – sales had previously been dropping on par with that of inventories. The Indicator’s Retail Sales data shows a modest rise three months in a row. Also, keep in mind the very recent industrial report showed an impressive spike. Still, new orders in the durable goods report remain anemic.
http://www.newyorkfed.org/education/bythe.html#busales
All in all, it seems to me that more time and more data is needed to be certain. In any case, if one agrees with the source sited in the news story, then one is also presuming that what we are experiencing is simply another business cycle inventory rebuilding, and that the ‘Great Recession’ will be a distant memory in the not to far future.