ITR Experts Say: Swelling Inventories Are a Potential Concern

On a recent visit to the United Kingdom I spoke to many business leaders about their outlooks for their companies in light of Brexit and its potential implications. What I heard most consistently were concerns related to the buildup of inventories, due to the uncertainty regarding the actual terms under which the UK would leave the European Union. More importantly, company leaders were anxious about the potential vacuum of demand, and its impact on their order books, should the post-Brexit UK economy undergo a substantial slowdown in which high inventories preclude the placement of new orders. At ITR Economics we are also concerned about this possibility, as a notable slowdown is exactly what we’re predicting for the UK, EU, and US economies over the next three to four quarters.

With the concept of swelling inventories in mind, it is prudent to assess the state of inventories here in the US, given that both US Industrial Production and US Nondefense Capital Goods New Orders (excluding aircraft), two benchmarks for our industrial economy, are now firmly on the back side of the business cycle in Phase C, Slowing Growth. Here is where the inventory levels for various segments of the US economy stand as of early June:

It is evident that not only are inventory levels rising in many key sectors of the US economy, they are doing so at an accelerating pace from already record-high dollar values. Even though Brexit will not impact the US to the same degree it will Europe, it is worth noting the striking parallel between our situation and the UK business leaders' concerns: namely, rising inventory levels at a time when the economy is clearly slowing down. The above data highlights an important divergence between Production and New Orders data series and Inventory levels. While the former have clearly transitioned to the back side of the business cycle, the latter remain firmly on the front side, in Phase B, Accelerating Growth.

This is a signal that companies need to adopt a more conservative and defensive approach for their production plans and inventory holding levels. Businesses should look for every opportunity to lock in longer-term contracts with their customers, if possible, to alleviate any gaps in new order intake as the economy decelerates further and pockets of outright negativity emerge in the industrial sector in the first half of 2020. If you would like to discuss your specific circumstances, and possibly enlist our help as you chart a course forward in these uncertain economic times, please reach out to us!