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Don’t Buy Into the Mania

Posted by Jackie Greene on May 26, 2021 9:37:59 AM

Supply shortages and rising prices have many companies stockpiling inventory. But should you?

The numbers are up across a wide variety of metrics:

  • US Total Retail Sales are at a record $6.625 trillion.
  • US Nondefense Capital Goods New Orders (excluding aircraft), a measure of business-to-business activity, are at a record $816 .8 billion.
  • US GDP is set to reach a record high during the third quarter of this year.
  • The US Producer Price Index is up 9.5% on the back of higher commodity prices, such as lumber prices and steel prices.

Growth in the economy plus rising prices and supply shortages has many decision-makers feeling compelled to get their hands on any and all materials that they can. We all know the pitfalls of not having enough inventory to meet demand.

However, this can be a dangerous part of the business cycle, and it’s important to take a step back from the mania and evaluate your position. Holding a lot of inventory can tie up your capital and end up costing you money.

As you saw above, key metrics are showing that the economy is growing at or near record levels. However, it is crucial to remember that this rate of growth is not sustainable. These metrics are in Phase B, Accelerating Growth, but Phase B does not last forever. Our analysis indicates that Phase C will be prevalent next year, which means we expect the economy to still be growing, but not at today’s fever pitch. Your needs will be different next year as the demand returns to more normalized pre-COVID levels.

I do not want to discount the supply pain you are feeling. Part of today’s scramble for supplies is due to capacity reduction caused by COVID-19 during the past year. This includes ongoing labor issues. Two other factors to consider are ramifications from tariffs causing prices to rise and general backorders being filled. As backorders are filled and vaccination rates enable facilities to return to 2019 utilization levels, the frenzy for materials will fade, and you do not want to be left sitting on a stockpile you do not need.

If you are unsure when the rush for supplies will end for you, let us know and we can help. Our ITR Trends Report™ and our company-specific tool, DataCast™, are available for 30-day trials at no cost. These powerful tools can keep you from over-building at the peak. Let your competitor tie up cash in an inventory surplus while you put your cash to work in other key parts of your operation.

 

Jackie Greene
Director of Economics

Topics: Director's Cut