Lisa and I got an e-mail from a friend earlier in the week that had quite an optimistic ring to it. He forwarded this Bloomberg article and interpreted it as potentially suggesting we were not only out of recession, but in a sustainable upward economic trajectory. But we're not buying it -- at least not yet. The article suggest that "companies from Tiffany & Co. to Home Depot Inc. are restocking shelves in a move that will boost economic growth and may keep the recovery on track through 2010." Moreover, "manufacturers added to stockpiles in March following 46 months of contraction, based on a factory index compiled by the Institute for Supply Management in Tempe, Arizona." One analyst in the dispatch is quoted as noting, "The most frequently cited reason for the improvement in volume was 'inventory replenishment.'"
Restocking alone is not the only driver of new order volumes. Reuters refers to Alan "irrational exuberance" Greenspan in the article, who suggests that "companies also will feel compelled to boost stockpiles because it's taking longer to get the materials they need to run their plants." Despite Greenspan's many flubs over the years (e.g., not realizing the mortgage bubble or lax lending standards as a ticking time bomb in the economy), he certainly has this one right. Even though raw and semi-finished material producers have taken volume offline during the downturn, they're not necessarily putting it back online just yet, though we're entering the early stages of a rebound. Moreover, mothballed capacity further up the supply chain will take time to bring back online as companies slowly rehire (which, given national healthcare, will prove more costly than before).
As to the broader issue of inventory replenishment and the rebound, here's how Lisa responded to our friend after reading this piece:
- "Inventory replenishment is not 'real demand.' It's apparent demand. The huge depletion in inventories in late 2008 throughout 2009 meant that any uptick in demand would send the supply chains spinning. And that is exactly what has happened.
- Several industry segments are indeed up ... automotive being one of them. Not huge up, like in 2007, but huge up compared to 2009. This creates a huge need to replenish because when you are at zero, anything better than disaster (2008 / 2009) means you need to buy stuff.
- I do think the growth will be strong enough to keep us out of recession. I think this is so based on consumer demand trends that I am seeing which show that the economy has flatlined (is no longer dropping, even from a consumer demand point of view) and even if it's not exactly "growing" it's doing better than 2009 which is all it takes to get producers to need to replenish inventory. Where it goes from there is anybody's guess...."
Lisa correctly iterates several points in her response. Yet the big question is: will replenishment lead into the next phase of recovery, or will we all be stuck holding another round of inventory as the cost of capital increases and orders slow, commodity and monetary inflation ensues and government spending comes full circle in the form of higher taxes for businesses and individuals?
- Jason Busch