Wednesday, July 1, 2009

"Mother of All Inventory Corrections"

In response to this mornning's ISM Manufacturing release, Ed at Credit Writedowns has a theory at what the ISM data points to:

They point to an increase in production which is no longer predicated on growth in new orders. In short, we may be seeing a huge inventory restocking – and that’s it. Notice how new orders are now contracting. Yet, inventories are considered too low. That has caused the manufacturing sector to crank up production to the point where
production is now growing.

Translation: manufacturing and production are now adding to GDP instead of subtracting from it. This is something I certainly anticipated (see my post “Third quarter auto production to be significant boost to U.S. GDP”). However, it looks more like this increase in production is merely a response to the low level of inventories. Until we see new orders firmly above 50 on this survey, you should be sceptical as to the sustainability of any increases in production.

Source: ISM


  1. I realize that the prices are probably significantly lower than they were a year or two ago.

    If production is increasing and inventories are decreasing, isn't that a sign that things are stabilizing, and possibly improving in manufacturing?

  2. yes and no.

    yes- this is one of the automatic stabilizers in our economic system. at some point people NEED to replenish their inventories

    no- the U.S. economy is EXTREMELY dependent on the consumer and at this moment, even after the huge downturn in spending, new order growth is still negative