ITR Experts Say Manufacturing

Know the Difference Between ‘Excess’ and ‘Elevated’

By ITR Economics on June 13, 2024

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Our blog last week noted that inventories are normalizing relative to their pre-pandemic trajectory. This is a positive development, given the way excess inventories tie up the holder’s resources, resulting in a deleterious impact on production, revenue, WIP, and other economic activity.

The caveat to this is that just because inventories are elevated relative to the past does not mean they are excess.

It will behoove executives and directors to delineate this distinction for their own companies, especially at this stage in the business cycle.

The “why” is due to the particular characteristics of the current business cycle:

  • The industrial economy, as measured by US Industrial Production, has entered Phase D, Recession; in April (the latest data), the 12-month moving average edged below the year-ago level. The April 12MMA is 0.1% lower than the April 2023 12MMA.
  • There are technical Phase Ds, in which the numbers technically meet the criteria for Phase D, but, sometimes, the magnitude of the decline does not reach normal business cycle decline characteristics. We are in such a technical Phase D (though conditions vary for individual markets and companies, and there is indeed some cratering going on out there).
  • This year’s recession, which could just as easily be perceived as mild stagnation rather than outright decline, will be, on a general basis, quite shallow.
  • We expect the business cycle decline to ease around the end of this year, provided that the Federal Reserve refrains from launching another round of restrictive monetary policy.

Due to the mildness of the expected decline and the relatively shorter lifespan of this downturn, you should be looking ahead to the rise coming in 2025.

That includes taking a hard look at your inventories. You might just now be catching your breath, relieved that your inventories are normalizing following the post-COVID bloat. It might seem crazy to spin around again and ask yourself, “Do I have the right amount?”

But we advise our clients to think a half business cycle ahead, and the question above is valid, given:

  • The economic rise forecasted for 2025 and and beyond – you need to be ready for it.
  • The rise we are forecasting for US Producer Prices in 2025 and 2026 – it is not likely to get less expensive to optimize your inventory.
  • The anticipated 2030s economic depression – the timeline is diminishing for building up your business (and your Financial Bunker) ahead of the worst economic conditions in generations.

Questions to ask yourself as you assess your inventories:

  1. How much do I need for the next six months versus the longer-term?
  2. When do I need to ramp up for post 2024?
  3. Are my supply chains resilient and redundant?
  4. With regard to the coming rise – for my company, how much of that will be actual units and how much dollar denominated because of inflation?
  5. Will my company commence business cycle rise before, at the same time as, or after the overall economy does?

If you need help answering these, particularly numbers 4 and 5, ITR Economics is ready to assist.

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