Inventory overhang continues to impact economic outlook

More than a few times, economic uncertainty has been a key theme of columns in this space. And today, again, is one of those times.

What got me thinking about this was the data coming from the United States Department of Commerce indicating the first advanced estimate for third quarter GDP increased at an annual rate of 1.5 percent.

That is a weak number to be sure, especially when compared with the second quarter’s 3.9 percent GDP. Not surprisingly, Commerce said in its release today that “the deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment,” among other factors, including lower exports and slowdowns in nonresidential fixed investment and personal consumption expenditures, and state and local government spending, among other factors.

It is not entirely surprising that high inventory rates are cited first as one of the reasons for this paltry third quarter GDP number. That has been the case for a while and it is evident in the inventory-to-sales ratio, which stands at 1.37 through the end of August, compared to 1.30 in August 2014. This ratio is derived from dividing the number of sales compared to available inventory, with the higher the ratio meaning inventory levels are running too high.

When this happens, it typically results in transportation volumes seeing declines, which is where things currently stand as we are now officially on the cusp of holiday shopping season.

That is good timing on two fronts: one being that it will result in increased consumer spending levels, which has been largely flattish as consumers have opted to pay down debt rather than shop more even though low gas prices were viewed not all that long ago as something that would spur increased spending, and another thing being a way to empty shelves and warehouses of the excess inventory, which is clearly needed.

That is not top say these things will serve as catalysts for steadier economic growth going forward, as most of what is coming over the next several weeks is seasonal, but it obviously won’t hurt either.

Less-than-truckload carrier YRC Freight put the current excess inventory situation into clear perspective in a customer note on its Web site, which explained that “U.S. businesses are experiencing inventory overstock at a level we haven’t seen since the beginning of the financial crisis in the fall of 2008.

The main reasons for this according to YRC Freight, are:
-a strong U.S. dollar giving businesses some international buying power that led to increased spending on business, coupled with leading many businesses to sit on more cash than in previous years and choosing to invest it into inventory;
-the aftereffects of the West Coast port labor situation last spring, which resulted in missed shipments and later deliveries that created a situation that left businesses with “a ton of inventory and few people still interested in buying it”; and
-an overestimazation of buyer activity in Q2 and Q3

These three factors, said YRC Freight, will force supply chains to be more cautious, and lead them to opt for smaller shipments moving in fast-cycle logistics systems to refill products rather than reorder large quantities of products to fill early stock-outs.

To be sure, there are a number of reasons for the current, and lasting, case of inventory overhang. How that situation gets improved and inventories get back to a more normalized level will take time and patience with no clear cut answers just yet. But it will be interesting to follow along the way.

How has the current excess inventory situation impacted your freight transportation, supply chain, and logistics operations? Newsroom Notes wants to know. Feel free to send me a line at [email protected] (no PR pitches for this please).