Washington/Paris: 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.
Glimmer of hope? A 2007 photo of an employee working on a Renault model in Novo Mesto, Slovenia. The French car maker is reducing its stockpiles to align excess supply with diminished demand. Hrvoje Polan / AFP
“The drop in inventories is good news,” says Ethan Harris, co-head of US 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 reducing their stockpiles to align excess supply with diminished demand. A JPMorgan Chase and Co. index of global inventory growth is close to an 11-year low, economist David Hensley said in an 11 March note.
In the US, factory inventories have fallen every month since September; in December, they dropped by 1.9%, the biggest monthly decline in 62 years of record-keeping. Data last week showed US industrial output in February was down 11% from a year earlier, the biggest annual decline since 1975.
The drop in the euro area in January was a record 17% from a year earlier.
Spurring the cutbacks is a collapse in world trade, which is contracting the most in 80 years, according to the World Bank. US industrial companies suffered what the National Association of Manufacturers calls an unprecedented drop of 20% 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 US factory jobs have disappeared since the US recession began in December 2007.
Akron, Ohio-based Goodyear Tire and Rubber Co., the largest US tyre maker, plans additional cost savings and inventory reductions after reducing output in the last three months of 2008 by 17 million tyres.
“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% drop this year in demand for wheel loaders, pipe layers and other equipment.