3rd Week Stocking filler

[qua 11]

The inventory cycle

Stocking filler

The economic slowdown does not herald a double dip. Yet

Jul 8th 2010

IF THE foreclosure signs that sprouted on front lawns across America symbolised the mortgage crisis and the queues outside Northern Rock, a British bank, epitomised the credit crunch, the best symbols of the manufacturing meltdown were the thousands of new Toyotas stowed on-board a vessel in Sweden with nowhere to go.

To clear such stockpiles, carmakers and other firms had to cut their production dramatically—even more dramatically than their sales. This destocking added to the world economy’s woes in the worst months of the crisis in early 2009 (see chart). But just as the downswing of the inventory cycle deepened the recession, the upswing has boosted the recovery. Output grew faster than sales, as firms refilled their warehouses as well as meeting customers’ orders. This swing in inventories accounted for over two-thirds of America’s growth in the first quarter. And it added over two percentage points to Asia’s growth (outside Japan and China), according to HSBC. The surge in industrial production helped lift the IMF’s latest forecast for global growth this year to 4.6% from 4.2% in April.

The recovery is now appearing in a less flattering light. In America the monthly surveys of purchasing managers by the Institute of Supply Management (ISM), a professional association, suggest the economy is losing momentum. The institute’s non-manufacturing index, which covers everything from home-building to pet care, fell to 53.8 in June from 55.4 the month before. The drop in its manufacturing index, from 59.7 to 56.2, was even more conspicuous. Although manufacturers added jobs in June, the average workweek shortened by half an hour, according to the Bureau of Labour Statistics. America’s metal bashers put in 5.5m fewer hours last month.

This slowdown is not confined to America. The global purchasing managers’ index (PMI) produced by JPMorgan and Markit, a research firm, showed the world’s workshops at full stretch in the spring, as they restocked at a record pace. But the ratio of inventories to orders is now back at its long-run average and the index has eased to 55 in June from a peak of 57.8 two months before. Even in China, according to an index prepared by Markit and HSBC, manufacturing output fell a little in June, ending a 14-month run of expansion.

The weak numbers spooked those who worry about a second recession. Double-dippers have history on their side: in five of the past seven American recessions, the economy dipped more than once. In two it dipped thrice. But the PMIs by themselves do not justify these fears. They may have fallen but more managers think their business is growing than shrinking. The reading for American manufacturing is consistent with GDP growth of 4.8%, according to Norbert Ore of the ISM.

Besides, if the slowdown can largely be blamed on the inventory cycle, it follows that the underlying recovery is no weaker than it was in the spring; it just looks worse. Jan Hatzius of Goldman Sachs expects America to grow at an annual pace of 1.5% for the remainder of the year, because that is how fast it has grown since the middle of last year if you ignore the effect of stock building.

In emerging Asia the weaker data are evidence of a complete economic recovery, not an imminent relapse. In most of the region, industry has caught back up with its long-run trend. If American manufacturing is slowing because warehouses are now amply stocked, Asian manufacturing is slowing because workshops are fully employed. The best symbol of this predicament is not shipfuls of unsold cars, but the picket lines of Chinese workers demanding higher wages.

Finance and Economics