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
restrictions on travel and socialising have been lifted.
* Merchandise has become increasingly expensive, with price
outstripping the much slower growth in household incomes.
* Manufacturers, distributors and retailers boosted orders
stocking earlier this year to avert a repeat of the supply chain
problems in 2021.
* With consumer expenditures slowing, the industrial supply
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
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
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.
- 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)