US manufacturing growth stalls amid inventory glut

U.S. manufacturing activity appears to be peaking as businesses struggle to digest excess inventory throughout the supply chain, which will likely weigh on the economy over the next six months.

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

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

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

* Household spending shifted back to services as pandemic-era travel and socializing restrictions were lifted.

* Goods have become increasingly expensive, with price increases outpacing the much slower growth in household incomes.

* Manufacturers, distributors and retailers increased orders and inventories earlier this year to avoid a repeat of supply chain issues in 2021.

* With consumer spending slowing, the industrial supply chain has shifted violently from inventory depletion to hoarding.

U.S. businesses held inventories equivalent to 1.32 months of sales in July, down 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 sharply.

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

Chartbook: manufacturing activity in the United States
Recent reports from major retailers such as Nike suggest that overstocking worsened in August and September, forcing increased discounts to weed out unwanted products.

Retailers and wholesalers reduced or canceled new orders from the United States and Asia. As a result, freight volumes are already down:

* The number of containers transported on the main American railroads is down 5% compared to the same period last year (“Weekly rail traffic report”, Association American of Railroads, September 28).

* Shipping lines have canceled dozens of voyages between Asia and the United States this month as demand for freight plummets (“Cargo owners cancel sailings as global trade shifts”, Wall Street Journal , October 2).

* Federal Express warned investors in September that parcel volumes were impacted late in the third quarter by weaker macroeconomic conditions in the United States and around the world.

Cycles of inventory stockpiling and destocking have always been a major source of short-term instability in the industrial economy (“Economic Cycles”, Zarnowitz, 1992).

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

Destocking alone is probably not enough to push the entire economy into a late-cycle recession rather than a mid-cycle soft spot.

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

The toxic cocktail of excess inventory with tighter financial conditions and growing business and household anxiety about a recession dramatically increases the likelihood of a harder landing.
Source: Reuters (edited by Paul Simao)

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