Thinking About the Risks of a Manufacturing Recovery

Earlier this month on Supply Chains Matters, Bob Ferrari shared a number of seemingly positive economic indicators that suggest a manufacturing recovery is underway. But should we get excited about the news? I'm not so sure. Still, when the ISM index passes the 50 mark (indicating growth) it can't be such a bad thing. As Bob suggests, "Eleven of eighteen manufacturing industries reported growth in August, which is an important sign of broad-based growth". Moreover, "new orders rose nearly ten percentage points to 64.9 in August, the highest level since December of 2004". All of this may sound like good news. But dig below the surface and you might become more of a curmudgeon -- not to mention seeing many potential risk areas to consider for your own commodity strategies.

For one, commodity prices in many areas have crept back up again in recent months. It is unlikely that producers and distributors will be willing to ramp up to pre-recession capacity and inventory levels until well into a recovery. This means that prices will not only potentially climb further if and when the economy continues its rebound, but also that supply availability might become a broad-based issue again. No one wants to be put on allocation, but the Scarlet Category A may very well come back into play again during a sustained -- or even start/stop -- recovery.

Likewise, there's a chance that low manufacturer inventory levels could further exacerbate the impact of capacity constrained supply market environments. In other words, we could very well see manufacturing lead-times increase, prices rise and on-time deliveries decline as companies at all tiers in the supply chain struggle with meeting order volumes (even in markets that only realize slight growth). So while I agree with Bob that "global supply chains may be turning the corner toward more positive growth" it would behoove us all to think through the potential risk factors of a recovery.

Jason Busch

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