There has been a huge destocking of inventory . However the credit conditions necessary to build stock …working capital…is in very short supply . I feel that demand …were it to exist …cannot easily be matched by supply and that there will be a noticeable lag in many countries but perhaps not in China where the government is in a position to readily supply working capital if orders come in .
The rest of the growth will be inflation driven if anything .
I read something recently that cautioned on inventories. The important thing, it said, was the inventory:sales ratio. Inventories are destocking, but sales are falling, so relatively, inventories are still too high in a JIT environment. If sales continue to fall, then inventories need to aswell. Buggered if I can find the research now, I think it was quoted on FTAlphaville, but it could be any of a half-dozen other sites!
Yes, but we will only see it in the rear view mirror.
The talk of green shoots has, IMO, been very damaging. It gave businesses the expectation that there would be an upturn soon, so they went out and bought stuff, enquired about buying stuff. So April’s indicators were quite good on the back of nothing but rumour. The rumour has failed to materialise, so May’s indicators are trashed again. In a normal environment, I think PMIs would be reliable, but forward expectation PMIs are being abused; on their own they are not sufficient for recovery. Add to this the free money slosh that is running through equity and commodity markets and you have a situation that could be a green-shoots bubble, that is, the expectation of recovery based has damaged the chances for recovery. Yes, I do think Mr. Soros’ reflexivity thesis has legs…
there’s something wrong with that argument ; low inventories doesn’t mean a sign of recovery it can also mean they’re not selling much cars for example, makes no sense to hold large inventories at all, also with the current move to much more flexible logistics chains then there’s no point at all and this move isn’t reflected ]
Agreed but low inventories also mean that there is very little manufacturing happening to maintain the inventories. Couple this with the current specualtive driven commodities price increases and you will maintain low inventories.
The following comment comes with a severe health warning as I am not a financial bod but I now firmly believe that those sign of hope of recovery that emerged in late March / April are being killed off by the surge in commodities and especially oil prices. My theory for this is based on the premise that anyone involved in manufacturing seeing the raw material and energy costs rise will keep the hatches battened down and hold off any manufacturing for less than 100% certain orders. Only when we have a period of stability on both energy and commodities prices will we see real sustained growth.
And I agree with you mikewest, that’s why I think the talk of green shoots has been incredibly damaging. Anyone who started up manufacturing again in April is now left sitting on a pile of unsold inventory (i.e. they’ve spent some of their precious capital, maybe taken some people back on, and for no sustained improvement in sales).
From a macro perspective, it is all a bit weird. In the US (and elsewhere?) they count increases in inventory as positive for GDP (since the goods are made) and decline in inventories as negative. From an amateur’s point of view, you’d have to think this is a bit wrong, as unless stuff is sold, it is just sitting in a warehouse somewhere…
The inventory argument has been around for a few months now.
What we do know is that manufacturing production fell by an unprecedented amount in the second half of 2008 and early 2009. Major industrialised countries witnessed large double digit percentage falls in manufacturing output. Since then producers have been running down inventories rather than producing anything new. However, there is merit to the argument that this cannot continue indefinitely.
Whilst the argument that the rate of decline in whatever economic factor that you are looking at is slowing is a pretty poor reason to get optimistic, there is a lot of evidence to suggest that, for the moment at least, the economic freefall has stopped. Admittedly, this does not mean that you need to immediately ramp up production again, but it does mean that producers are now left with too low-levels of inventory and some production must be restarted. The PMI indices aside, industrial production has ticked up (and i mean actually up, not less down) in the US, UK, Japan and and Korea.
Whether this is sustainable or not is the key question.
Let me get this straight. I am not predicting a return to growth, but some recent hard economic data has been mildly encouraging. Personally, I think that we are in the process of entering a classic double-dip recession because this recession has a lot longer to run. In the short term however, we could yet see further improvment in a host of economic indicators.
Demand does not have to stay constant for production to re-start. Initially (at least) production fell by more than demand. Demand has fallen too (and may still be falling) but the inventories will only last so long. So some production will be needed to replace inventories and that is perhaps what some of the industrial production data is telling is.
We don’t know how by how much demand for industrial output has been permanently reduced, all we do know is that from late March of this year things stopped getting worse. This then fed through to the manufacturing surveys and it is only within the past month or so that there has been any improvment in real economic data.