US Inventory Still Needs to Go

Today's trade and factory data added further detail to the theme I wrote about in this week's Global Weekly Summary - namely that the US is involved in an inventory-dump which is playing nicely for the trade balance, but is hobbling the industrial economy. More, attempts to shift inventory, which have so far included attempts to push it downstream from manufacturers to wholesalers to retailers, are not going well. The trade deficit will narrow further, the industrial rebound will be delayed, pricing pressures will continue to be muted for months to come.

What did we learn today? Well, first that November's trade deficit narrowed by a further $3.9bn mom to $43.1bn, which is as low as it has been since September 2017. The principal reason is that imports are flagging; they fell 1% mom in November, having shrunk 1.7% in October and 1.6% in September. Before seasonal adjustments, goods imports fell 7% yoy, with a monthly movt 0.8SDs below historic seasonal trends. In fact, the 6m break below trend is now the most dramatic since the beginning of 2016. Exports, meanwhile, rose 0.7% mom sa, with goods down 1.8% yoy with a 0.6SD break above trend.

But perhaps more interesting was the raft of data describing manufacturers' November. New orders were down 0.7% mom, but whilst shipments rose 0.3% mom, but inventories also rose 0.3% whilst unfilled orders fell 0.4%. In other words, the underlying ratios which drive short-term production and pricing schedules are not yet getting better. First, manufacturers' inventory/shipment ratio remains stuck at 1.40x, which is as high as it has been since mid-2016. Manufacturers are still carrying more inventories than their underlying business needs, so they will try and reduce it by either by cutting production or cutting prices, or a mixture of both. Second, the unfilled orders / shipment ratio has fallen to 2.34x, which is roughly where it has been since mid-2017. In practice, this means there is limited opportunity to muscle down inventories by accelerating shipments to end-clients.

And would they want them anyway? Bear in mind that in October, whilst wholesalers managed to keep their inventories flat (as they did in November as well), their inventory/sales ratio actually rose since wholesale sales dropped 0.7% mom (having fallen 0.1% in both October and September). As a result, wholesalers' inventor/sales ratio ticked up to 1.37x, the highest since early 2017.

The point to grasp is that despite the industrial slowdown, none of these ratios are yet even moving in the right direction, let alone getting back to safely-expansionary levels. The US inventory situation isn't yet under control, so expect more industrial pressure, more pricing pressure, and, incidentally, better trade numbers for some months yet.