Persistently high inventory levels make things tough for retailers, truckers

According to U.S. Census Bureau data issued in mid-March, the inventory-to-sales ratio for January hit 1.40, meaning there is an excessive amount of product in inventory relative to current sales. The January data was the most recent as of this writing. (The Census Bureau issues new figures monthly. Current data can be found here.)

Most of the excess goods were in the apparel and general-merchandise categories, although inventories in automotive seemed to be elevated as well, according to the trade group National Retail Federation (NRF).

The ratio spiked in early 2015 in the wake of the West Coast port slowdown that ended in February of last year after labor and management agreed to a five-year contract. After flattening out for about five months, the ratio resumed its incline in midsummer to hit the most recent Census levels. The ratio in January 2015 stood at 1.36. The higher ratio in January 2016 means that inventories, measured in the value of product, were $52.3 billion higher than a year ago, according to data from consultancy IHS.

There are various reasons for the elevated levels. Retailers had to work off inventories they had built up in advance of the West Coast port disruptions. Cargoes were so backlogged at docks or on ships that by the time the dispute ended and the goods finally moved onto store shelves, many were out of season and did not get sold. A strong U.S. dollar made U.S. exports more expensive in world markets, blunting one of the traditional channels for U.S. inventoried product. Retailers overcommitted to the 2015 peak holiday shopping cycle, and were bedeviled by a relatively warm 2015-2016 winter season that crimped demand for cold-weather products.

Retailers may have also overestimated the degree of the so-called fuel-price dividend, the extra consuming power a typical household gained from the dramatic decline in fuel prices over the past 20 months. Chris Christopher, director, U.S. macro and global economics at IHS, estimated the annualized per-household dividend at $750. This works out to about $15 a week—not enough for a family of four to do much with other than go out to eat, which had the added effect of cannibalizing sales of grocery stores, Christopher said.

Jack Kleinhenz, NRF's chief economist, said that over the past 18 months consumers have spent more on services than on goods, a shift that may have led to more unsold product. An added burden for retailers is government data showing price deflation in goods, but not in services, Kleinhenz said.

As a result, retailers are coping with the double whammy of less traffic and lower selling prices. "Retailers are really in a bind," said Christopher.

Elevated inventories have a direct effect on the trucking industry, which moves nearly 70 percent of all U.S. freight. Businesses have little reason to place orders until they work off excess inventories, which means there would be less demand for shipping services.

Bob Costello, chief economist of the American Trucking Associations (ATA), who has been sounding the inventory alarm for months, did more of the same in a statement disclosing February's truck tonnage results as measured by the group. "I'm still concerned about the elevated inventories throughout the supply chain," Costello said at the time. Consistently strong freight traffic will not materialize until inventories are drawn down, he added.

Kleinhenz said that data points reported in the early months of the year tend to be volatile, and may not presage a sustainable trend. He added that the increased activity in services could be a temporary condition. It is difficult to attribute the month-to-month movement in the ratio to any one factor, he said. "Balancing sales and inventory plans is truly an intricate challenge for retailers as they respond to an ever-changing market influenced by competition, weather, demographics, fashion, tastes, and anytime-anywhere spending by consumers," he said in an e-mail.

Christopher of IHS said there are brighter days ahead going into the spring and summer months. A combination of continued economic growth, more predictable weather patterns, and a weakening of the dollar will promote U.S. exports, he said, combining to end the inventory drag by the end of June. "There's help on the way in drawing down inventory," he said.

For retailers, suppliers, and their transport partners, that help can't come soon enough.