Manufacturing Crash Empties Inventories, Sets Stage for Rebound
By Matthew Benjamin and Simon
Kennedy
March 23 (Bloomberg) -- The news about global manufacturing
is so bad, it
might be good.
As factory production collapses around the world, excess
inventories
that stand in the way of an eventual recovery are
disappearing even faster. That may allow
manufacturing to
stabilize later this year, providing some relief for a global
economy that is
contracting for the first time in six decades.
“The drop in inventories is good
news,” says Ethan
Harris, co-head of U.S. economic research at Barclays Capital in
New York
and a former economist at the Federal Reserve Bank of
New York. “Just as unusually low valuations
set the stock
market up for recoveries, unusually low inventories set up the
economy for
recovery.”
The really good news, economists say, would be if
stockpiles were
shrinking because of greater demand for the
world’s autos, earth-movers and refrigerators.
There’s no sign
of that: Factories around the world are making the sharpest and
swiftest cuts
to production ever, the International Monetary
Fund says.
Caterpillar Inc. and
Renault SA are drawing down their
stockpiles to align excess supply with diminished demand. A
JPMorgan Chase & Co. index of global inventory growth is close
to an 11-year low, economist David
Hensley said in a March 11
note.
In the U.S., factory inventories have fallen every
month
since September; in December, they dropped by 1.9 percent, the
biggest monthly decline in
62 years of record-keeping. Data last
week showed U.S. industrial output in February was down 11
percent from a year earlier, the biggest annual decline since
1975. The drop in the euro area in
January was a record 17
percent from a year earlier.
Collapsing
Trade
Spurring the cutbacks is a collapse in world trade, which
is contracting the
most in 80 years, according to the World
Bank. U.S. industrial companies suffered what the
National
Association of Manufacturers calls an unprecedented drop of 20
percent or more in
business investment, exports and durable-
goods orders at the end of last year.
That
means empty warehouse shelves and factory lots may
have to stay that way, at least until the second
half of the
year, before things pick up.
What’s more, the process of working off
the stockpiles
still has a way to go, pointing to more months of economic pain
and job losses.
Already, 1.3 million U.S. factory jobs have
disappeared since the U.S. recession began in December
2007.
Akron, Ohio-based Goodyear Tire & Rubber Co., the largest U.S.
tiremaker, plans
additional cost savings and inventory
reductions after reducing output in the last three months
of
2008 by 17 million tires.
How Deep?
“While inventories bottom at the end of recessions, we
don’t know how deep that bottom goes,”
Harris says. “A sharp
decline in inventories has little information about the timing
of the
recovery.”
Still, the rapid reduction is a change from previous
slumps, when
businesses were slow to whittle down inventories
and the eventual drawdown held back recovery, says
Elga Bartsch,
chief European economist at Morgan Stanley in London. Now, just-
in-time
inventory management and closer interaction between
firms at different stages of the supply chain
mean companies’
stocks are in better synch with the economy, she says.
For
example, Caterpillar, the world’s largest maker of
construction equipment, has been allowing
dealers to cancel
orders as it cuts production. The goal is to match output with
an expected 30
percent drop this year in demand for wheel
loaders, pipelayers and other equipment.
‘A Pretty Decent Job’
“We’ve done a pretty decent job trying to
keep a lid on
inventory,” though “it needs to go down further,” says Mike
DeWalt, head of
investor relations at the Peoria, Illinois-based
company.
“Manufacturers are
feeling more of the pain, and until
they get the inventories cleared out, they will feel a
slowdown,” says Stephen Gallagher, chief U.S. economist at
Societe Generale in New York.
European factories are at a similar stage, says Peter
Vanden Houte, chief European
economist at ING Wholesale Banking
in Brussels. “Inventory reduction threatens to be a major
drag
on growth in the first half of the year,” he says. “There will
then be some
stabilization in manufacturing in the second
half.”
Mark Wall, an economist at
Deutsche Bank AG in London,
estimates that while inventory management will reduce euro-area
gross domestic product by 0.6 percentage point in the current
quarter, it will add to growth in
the rest of the year.
‘Far Out of Line’
“Still,
the level of stocks remains far out of line with
demand and will thus continue to weigh on
production
prospects,” he says.
Renault, France’s second-biggest carmaker, has
shuttered
plants and ordered temporary layoffs to slow production after
plummeting consumer
confidence and tighter credit led to a
buildup of unsold autos.
“Inventory
management and reduction will remain a priority
throughout 2009,” Renault said in a Jan. 9
statement. The
company, based in the Paris suburb of Boulogne-Billancourt, said
it had trimmed
supplies to 70,000 vehicles from more than
100,000 in September after slashing fourth-quarter
production by
50 percent.
Wolfsburg, Germany-based Volkswagen AG, Europe’s
largest
automaker, aims to cut stocks across its nine-brand group to
about 100,000 vehicles
from 160,000 by the end of March.
Brussels-based Solvay SA, the world’s largest soda-ash maker,
is
curbing output of chemicals, hydrogen peroxide, caustic soda and
PVC plastic to prevent a
further buildup in unsold goods.
Manufacturing Cutbacks
Cutbacks among manufacturers around the world will push
global industrial production down at an
annual rate of between
25 percent and 30 percent this quarter, JPMorgan Chase’s Hensley
estimates. The decline should slow to between zero and 10
percent in the second quarter, he
says.
Hensley says that consumer demand has firmed up in recent
months, which
“would set the stage for a stabilization in
manufacturing and the economy towards mid-year.”
Some companies already are seeing flickers of reviving
demand. FedEx Corp. last week
predicted companies would start
replenishing depleted inventories later this year, helping keep
the economy from shrinking further. The Memphis, Tennessee-based
package-shipping company is a
bellwether for the U.S. economy
because it delivers everything from documents to manufactured
goods such as clothing and auto parts.
‘About the Bottom’
Chief Financial Officer Alan Graf said on a March 19
conference call that FedEx is
unlikely to see further declines
in its international air-freight business. “We think that’s
about the bottom,” he said.
Tokyo-based Nippon Steel Corp. said last month output
should improve next quarter because customers have used up their
stockpiles. Nissan Motor Co.,
Japan’s third-largest automaker,
said on Feb. 26 it will raise domestic production next month,
while Toyota Motor Corp., the world’s largest car company, plans
to increase manufacturing in
May as it unveils new models.
That’s after Japanese factories cut production by 31
percent in January from a year earlier, driving unsold supplies
down 2 percent in the month.
Says Norbert Ore, chairman of the Tempe, Arizona-based
Institute for Supply
Management’s manufacturing business survey:
“It’s time to start to think the supply chain is
getting
control of inventories.”
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