Despite relatively strong corporate profits, U.S. companies remain cautious. Inventory growth is likely to be much like it was last year: modest and slow.
Five years after the official end of the Great Recession in June 2009, U.S. companies continue to be cautious about inventory holdings, despite relatively strong corporate profits and record-setting equity markets and asset appreciation.
Anemic gross domestic product (GDP) growth rates and the end of "hyperglobalization" have made many companies apprehensive of ramping up production. Real GDP growth in the United States averaged 3.2 percent per year between 1980 and 2007. Since the end of the Great Recession (December 2007-June 2009), real GDP growth has averaged just 2.3 percent. Currently, IHS is forecasting 2014 real GDP growth at 2.1 percent, a point below the 2.2-percent rate registered in 2013. Despite that low growth forecast for this year, significant improvement is expected in 2015 and 2016, with growth rates ranging from 2.8 percent to 3.4 percent. The improved performance is expected to be broad-based, with sizable gains in exports, residential fixed investment, nonresidential fixed investment, and consumer spending.
Article Figures
[Figure 1] Manufacturing and trade (inventory/sales ratio)Enlarge this image
[Figure 2] Real stock of inventories (billions of chained US dollars, end of period)Enlarge this image
Comeback for domestic auto sales
First-quarter domestic U.S. sales were subdued due to an unseasonably cold winter that put a damper on housing, retail sales, and auto sales. However, the second quarter is looking significantly better.
Leading the way are U.S. auto sales, which have been doing relatively well after a pause in the first quarter. Sales of new light vehicles topped 16.9 million units SAAR (seasonally adjusted annualized rates) in June—the highest monthly figure since July 2006. For the second quarter, the average was 16.5 million units SAAR, up from an average of 15.6 million units for the first quarter. This is notable because there have only been three other instances of quarter-to-quarter growth of 1 million units SAAR or higher over the past 15 years. The "Keep America Rolling" programs during the fourth quarter of 2001 and "Cash for Clunkers" in the third quarter of 2009 each exceeded SAAR growth of 2 million units. The third was SAAR growth of approximately 1 million units registered in the first quarter of 2006.
This year's second-quarter recovery, while unsustainable from a long-term perspective, does reflect the resilience of the U.S. consumer assisted by continuing loose credit conditions—including a rising subprime loan mix and longer loan terms—that help support new vehicle sales, especially as incentive levels have remained relatively steady over the past two months.
Looking forward to the second half of this year, we do not expect the robust second-quarter auto sales growth to persist in the third and fourth quarters. In addition, the strong growth rates experienced since 2010 are likely to subside, and for the next two and a half years auto unit sales are likely to be in the 16.3- to 16.7-million-unit SAAR range.
Inventory growth: Slow going
Since the end of the Great Recession, U.S. business (manufacturing, wholesale, and retail) inventory-to-sales ratios have been hovering between 1.25 and 1.31 (see Figure 1). The uptick in the latter half of 2012 was due to aircraft orders, most notably Boeing's 787-9, also known as the "Dreamliner." Aircraft and aircraft parts have long production cycles and thus contribute to a significant boost in input inventories.
Manufacturing inventories took a serious hit in the beginning of 2008 due to the onset of the Great Recession and the global financial crisis. It took four and a half years (through the second quarter of 2012) for manufacturing inventories to return to pre-crisis levels. Between the second quarter of 2010 and the latter part of 2012, inventory growth was relatively strong, supported by stronger sales and exports. Since then, however, that trend has been slightly muted due to the relatively slow economic growth in many emerging markets.
Slower growth in many emerging markets has also been a drag on manufacturing sales growth, which started slowing down in 2012 due to weak exports of goods to those markets. Our manufacturing inventories outlook for Q3/2014 through Q4/2016 is a little brighter, though, as domestic consumer spending is expected to pick up in the latter part of 2014 and many eurozone countries are beginning to grow at a slightly faster pace. However, there is considerable downside risk for global trade growth due to potential oil-price spikes, a possibility while uncertainty concerning the future of Iraq remains and the turmoil in the Middle East as a whole continues.
Real wholesale inventories were not affected during the early part of the Great Recession as compared to manufacturing inventories. But real wholesale inventories took a hit in the fourth quarter of 2008 and did not recover until the third quarter of 2012. One reason is that wholesale inventories are greatly affected by domestic agriculture yields. The drought in the summer of 2012, which reduced U.S. corn and soybean yields, substantially mitigated inventory growth until the third quarter of 2013, when agricultural yields returned to normal levels.
Real retail inventories, the first to be affected by the Great Recession, took the longest to recover. Retailers have been extremely cautious with their inventory holdings, since their margins are very tight and the financial health of many U.S. households has deteriorated substantially. Household median income adjusted for inflation is currently 8 percent below its 2007 level and is not expected to recover until 2020. In addition, e-commerce retail sales have gained significant traction over the year, and many "cyber stores" have a significantly lower inventories-to-sales ratio than do traditional brick-and-mortar stores.
Wholesale inventories increased at an average of 1.5 percent over the past four quarters, and retailers experienced inventory growth at a 1.1-percent clip over the same period.
As shown in Figure 2, our forecast is for all three sectors to experience moderate inventory growth, with retail inventory growth likely to outpace that for manufacturing and wholesale over the next two years. Retail inventory is expected to increase at 1.1 percent per quarter on average over the next two years, while manufacturing and wholesale inventories are each projected to grow at a more modest pace of 0.6 percent per quarter over the same period. In other words, the best way to describe the near- and medium-term outlook for inventory is "more of the same."
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.