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U.S. manufacturing growth stalls amid glut of inventories: Kemp

10/03/2022 | 01:19pm EST

LONDON, Oct 3 (Reuters) - U.S. manufacturing activity appears to be peaking as businesses struggle to digest excess inventories all along the supply chain, which will likely weigh on the economy over the next six months.

The Institute for Supply Management (ISM)’s manufacturing index slipped to 50.9 (36th percentile for all months since 1980) in September, down from 52.8 (50th percentile) in August and 57.6 (84th percentile) in January.

The forward-looking new orders component slumped to 47.1 (11th percentile) in September from 51.3 (25th percentile) in August and 57.9 (61st percentile) in January, implying activity is likely to slow further.

U.S. manufacturers, distributors and retailers are struggling with a downturn in purchases of merchandise that has left them with too much inventory:

* Household spending has rotated back to services as pandemic-era restrictions on travel and socialising have been lifted.

* Merchandise has become increasingly expensive, with price rises outstripping the much slower growth in household incomes.

* Manufacturers, distributors and retailers boosted orders and stocking earlier this year to avert a repeat of the supply chain problems in 2021.

* With consumer expenditures slowing, the industrial supply chain has swung violently from inventory depletion to accumulation.

U.S. businesses held inventories equivalent to 1.32 months of sales in July, up from 1.27 months in January and 1.26 in July 2021.

The rise in the inventory ratio is the fastest and most sustained since late 2018 and early 2019, when rising trade tensions between the United States and China caused the economy to slow abruptly.

In recent months, the glut of inventories has been particularly pronounced at the wholesale and retail levels. Retail inventories increased to 1.23 months in July 2022 up from a record low of 1.09 months in October 2021.

Chartbook: U.S. manufacturing activity

Recent reports from major retailers such as Nike suggest over-stocking worsened in August and September, forcing an increase in discounting to clear unwanted products.

Retailers and wholesalers have been scaling back or cancelling new orders from both the United States and Asia. As a result, freight volumes are already falling:

* The number of containers hauled on major U.S. railroads is running 5% lower than at the same time last year (“Weekly rail traffic report”, Association American of Railroads, Sept. 28).

* Shipping lines have cancelled dozens of voyages between Asia and the United States this month as demand for freight falls (“Cargo shipowners cancel sailings as global trade flips”, Wall Street Journal, Oct. 2).

* Federal Express warned investors in September that parcel volumes have been adversely affected towards the end of the third quarter by weaker macroeconomic conditions in the United States and around the world.

Inventory stocking and destocking cycles have always been a major source of short-term instability in the industrial economy (“Business cycles”, Zarnowitz, 1992).

Efforts to reduce excess inventories are likely to weigh on manufacturing activity and the rest of the economy over the next six months based on previous cycles.

Destocking on its own is probably not enough to push the entire economy into a cycle-ending recession rather than a mid-cycle soft patch.

But the inventory adjustment is occurring in an environment of rising interest rates, stricter lending conditions, persistent inflation, falling household real incomes, a strengthening dollar and weakening sentiment.

The poisonous cocktail of excess inventories with more stringent financial conditions and increasing business and household anxiety about a recession greatly increases the probability of a harder landing.

Related columns:

- Dollar shock threatens global economy

- Oil prices and financial markets brace for recession (Reuters, Sept. 15)

- U.S. manufacturing activity shows signs of peaking

- Oil and interest rate futures point to cyclical downturn before end of 2022 (Reuters, July 22)

John Kemp is a Reuters market analyst. The views expressed are his own (Editing by Paul Simao)


ę Reuters 2022
Stocks mentioned in the article
ChangeLast1st jan.
BRENT OIL 0.70% 87.47 Delayed Quote.11.95%
NIKE, INC. 0.98% 112.2 Delayed Quote.-32.68%
WTI 0.93% 81.892 Delayed Quote.6.45%
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