Worsening Inventory Pileup Rattles Goods-Based Economy

Saturday, March 23, 2019
By Paul Martin

by Wolf Richter
WolfStreet.com
Mar 22, 2019

And how it compares to what happened during the Financial Crisis.

The goods-based segment of the economy is heading for rough waters, and it is further diverging from the path of the services-based segment of the economy that is still growing at a solid rate: that’s what the current inventory pileup tells us.

When inventories pile up, sales by those companies that supply that inventory do well. But companies that sit on that inventory and have trouble selling it will at some point cut their orders to reduce their inventories. When this happens, sales drop all the way up the supply chain.

And the inventory pileup, particularly in durable goods at the wholesale level, just keeps getting worse. In January, these inventories surged 11.7% from January a year ago, and are up 17% from January two years ago, hitting $415 billion, the highest ever, according the Commerce Department this morning.

At the same time, sales of durable goods by these wholesalers rose 4.7% in January year over year, to $245.6 billion. Sales had peaked in September last year.

And the inventory-to-sales ratio for durable goods rose to 1.69 in January, the highest ratio since August 2016, back when the goods-based sector was coming out of the last inventory pileup that had led to the recession in the goods-based sector that had dragged down overall economic growth for 2016 to just 1.6%, the worst since the Financial Crisis. Only the much larger services sector, which was still growing, kept the economy out of an overall recession.

During 2015 and 2016, wholesales of durable goods declined and inventories were whittled down as wholesalers cut orders, which slowed down the whole supply chain. It was a drag on GDP, but eventually the inventory-to-sales ratio was brought into line. Now a similar scenario is building up:

The Rest…HERE

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