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.
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."