Taking it slow

Four years after the official end of the Great Recession in June 2009, U.S. companies are still proceeding with caution when it comes to inventory accumulation. Although domestic retail sales, especially for automobiles, are looking comparatively better than exports, American businesses remain hesitant to stockpile goods and materials.

Many manufacturers were caught off guard by the recent slowdown in the emerging markets. Brazil's 2012 real gross domestic product (GDP) growth rate, for example, was just 1.0 percent. The slower growth in those markets meant weaker U.S. exports beginning in the latter half of 2012 and continuing to the present. This dampened demand is expected to continue, and IHS Global Insight has revised downward most real GDP growth forecasts for emerging markets for both the near term and the long term. That said, GDP growth in emerging markets still far outpaces growth in the advanced economies.

Article Figures

[Figure 1] Manufacturing and trade (inventory/sales ratio) Enlarge this image

[Figure ] Real stock of inventories (billions of chained US dollars, end of period) Enlarge this image

With eurozone economies digging deeper into recession territory, U.S. manufacturers face weaker demand for exports into that region as well. The European debt crisis took a new turn earlier this year, with the Cyprus banking crisis reminding many that even though certain risk has dissipated somewhat, Europe still has significant problems that will not be solved in the near term. In fact, the so-called PIGS countries (Portugal, Italy, Greece, and Spain) are facing tremendous difficulty in gaining economic traction, creating a downside risk for U.S. exports.

U.S. consumers to the rescue
The recent momentum of U.S. auto sales plus the apparent uptick in housing starts and prices point to a release of pent-up demand that is supported by relatively modest inflation, payroll gains, and surging consumer confidence. Most interestingly, wage gains have recently started to outpace price increases, not because wage gains are strong—in fact they are anemic—but because price increases have been very modest.

IHS Global Insight forecasts indicate that real consumer spending will increase 1.9 percent in 2013, and then will increase 2.4 percent in 2014 as the impact of the U.S. federal budget sequester dissipates. Consumers may be spending at an average pace, but they are feeling considerably better and spending at record levels on autos. The June 2013 reading of the Conference Board's Consumer Confidence Index stood at the highest level since January 2008. Also in June, U.S. auto (light vehicle) sales reached 15.9 million units (seasonally adjusted annualized rate); that's the highest level since November 2007. Sustained auto inventory, greater credit availability, a large number of aging vehicles that need to be replaced, and the introduction of high-quality new products by automakers have created a very favorable environment for purchasing new vehicles. IHS Global Insight expects U.S. light-vehicle sales to end up at around 15.4 million units for 2013, and then to jump to 15.8 million units for 2014.

Inventory outlook
Since the Great Recession (December 2007-June 2009), the U.S. manufacturing and trade (wholesalers and retailers) inventory-to-sales ratio has been hovering in the 1.25 to 1.30 range. (See Figure 1.) The uptick in that ratio in the latter half of 2012 was due to aircraft orders, which have a long production cycle and thus boost work-in-progress inventory. Of course, the recent weakness in manufacturing is being offset by the relative strength of domestic demand.

For their part, retailers have been very cautious when it comes to inventory building because of tight margins and sluggish demand. In addition, technological advancements in supply chain management and the expanding role of e-commerce are making excessive inventory holdings a thing of the past. Currently, U.S. e-commerce retail sales stand at 5.5 percent of all retail trade; IHS Global Insight expects that market share to grow to over 7.4 percent by the fourth quarter of 2017. The rise in online sales places considerable downward pressure on retail inventories. Nevertheless, retail inventories overall are expected to continue to trend upward. We expect retail inventories to surpass their pre-recession peak before 2015.

As manufacturing recovered in 2012, manufacturing and wholesale inventory levels bounced back. (See Figure 2.) In particular, wholesale inventories, which benefit from manufacturing and retail inventories, surpassed their pre-recession peak in mid-2012. The forecast for manufacturing inventory growth is expected to be slightly weaker than that for wholesale inventory growth. In addition, retail inventory growth is likely to outpace that for wholesale.