Don't Bet on a Sustained Recovery Just Yet (But Do Put Your Chips on Volatility)

Over on Spend Matters affiliate site Metal Miner, Stuart Burns recently took out his virtual pen and analyzed the latest U.S. GDP numbers which, on the face if it, may suggest a solid recovery. After all, it appears that we're "expanding at the fastest rate in six years," realizing Q4 economic growth of 5.7%. But if you dig below the numbers, much of the growth can be attributed to what Stuart refers to as the 800-lb. gorilla in the room -- inventory. He writes, "firms reduced inventory by 'just' $33.5bn in the fourth quarter compared to $139bn in the third quarter. That simple slowing in inventory reduction contributed a massive 3.4% of the overall 5.7% rise in GDP."

In other words, restocking played a major part in GDP growth, and what remains is less that impressive (certainly some or all of which we could attribute to stimulus finally making its way into the economy).
In Stuart's words, this "raises some serious questions about the strength of the underlying recovery and the possibility that the first and second quarters of 2010 will continue to grow at anything like this level … What we have seen is the tipping point where metals consumers like steel producer Nucor have worked scrap and pig iron stocks down to near zero and are now coming out into the market to buy raw material again, but not because their customer demands have increased."

In Spend Matters' view, companies in the manufacturing supply chain should prepare for significant volatility this year as restocking activities continue throughout the first part of the year. But it's not just price volatility with which we should concern ourselves; given the restrictive credit markets and the potential for rising material costs, we could very well find ourselves facing tier-one and tier-two suppliers who don't have enough working capital to fund materials, labor, and overhead for our new orders. Only under a sustained recovery are banks and other sources of liquidity likely to open up the credit floodgates again. When (and if) that happens remains to be seen.

Jason Busch

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