Wednesday, May 16, 2012

US inventories remain lean

The US Department of Commerce’s monthly business inventory report shows March inventories rose only 0.3% from February, the slowest rate since November 2011.  This could suggest that businesses remain cautious as the economic growth rate slows to a more moderate pace.  It could also suggest supply chains have become more efficient particularly as sales increased 0.6% resulting in a decline in the sales to inventory ratio to 1.27 from 1.28 in February. This ratio indicates that it would take approximately 1.27 months for a firm to deplete its current inventory.

Since the 2009 recession, businesses have made many improvements and upgrades to their supply chains in order to compete in a changing global economy. Improving forecasting tools, leaner distribution practices and changing modal transportation usage may be playing a role in lower inventory levels. However, in all likelihood, caution is playing the larger of the role.

After businesses replenished stock earlier this year due to strong demand, there now appears to be growing concern over the economy, both domestic and global, among businesses and consumers. Although retail sales grew 0.8% in March, sales slowed in April to 0.1%.  Still, the National Retail Federation reaffirmed its 2012 retail sales forecast of 3.4%. Also, manufacturing activity increased 1.4% in April while new orders increased 3.7%. This will lead to a need to replenish inventories as manufacturers surveyed by the Institute of Supply Management, indicated that inventories contracted 1.5%.

Current transportation data also indicates a rise in inventory.  For example, according to Zepol, ocean containerized imports increased 8.65% in April compared to April 2011 and 9.77% from March 2012. Of particular interest, Asian containerized imports increased 15.55% year-over-year during the month.  Two ports that have already released April statistics indicate containerized imports are indeed on the rise. The Port of Los Angeles noted a 16.71% increase while the Port of Charleston noted a 5.2% increase.

Barring any unforeseen global supply chain disruption, the US economy is on track for continued, albeit, slow, economic growth this year. Business and consumer demand will likely remain moderate at best thus resulting in continued lean inventories. However, inventory levels may witness an occasional spike but just for short-term.