Thursday, February 4, 2010

Taking Inventory

Warehouse workers Roy and Jim had just finished unloading and storing their first large product delivery in months. Roy looked at the shelves and said, “Wow, I can remember just a couple years ago when every shelf was packed full of goods. We even had to buy more shelving units to hold it all. But now, there are as many empty shelves as full ones.”

“That might by so,” said Jim. “But just last month we hardly had any product in here and now look at this place!”

And thus the rest of the day was devoted to debating that eternal inventory question: Is the warehouse half-empty or half-full?

There is much debate about initial Q4, 2009 GDP coming in at 5.7%. Most of this growth was due to companies replenishing their inventories after drawing them way down during the depths of the recession. The optimists see the 5.7% as a strong sign of economic recovery. The pessimists complain that the 2% “underlying growth” rate (after the inventory factor is eliminated) is weak.

It is silly to argue about this. While the growth rate of 5.7% is not sustainable, businesses were confident enough to order more goods. Now there is more inventory available in anticipation of increased future sales, and that is a good thing.

Checking the Commercial Transportation Industry

Because the commercial transportation industry is a microcosm of the general economy and the source for most of the factors that make up the Model “T”, it is a good time to check on what is happening in this sector.

▶ Truck freight improved in Q4, 2009. All of the freight indexes showed gains, although the growth was “choppy” and the increases small.

▶ Rail freight last week was up 3.9% from 2009, but still down 11% from 2008. Most categories of freight were up except for some materials used in new construction. Rail freight has been improving, but also has seen month to month variation.

▶ Spot freight (this is the equivalent of the demand for temporary workers in the employment market) was up 11% in December (third straight y/y gain) and was much improved from last year.

▶ Several large trucking fleets returned to profitability in Q4 due to cost cutting, improved productivity, and improved freight demand. Many mid-sized and small fleets are still losing money and some long-time haulers have closed their doors.

▶ Over 80,000 truck drivers remain unemployed. November payrolls were only down 0.2%. Fleets are only operating at around 75% of capacity, but utilization has increased four straight months. Fleets are expected to start hiring back some drivers in Q1.

▶ Freight Transportation Research says that truck freight has bottomed out and will return to sustained, modest, growth beginning in Q2. It predicts 3.6% freight growth for 2010.

▶ There is an excessive amount of trucks and trailers (and rail cars) sitting idle. In addition, used truck and trailer inventory remains bloated. This “slack” will severely limit new truck and trailer sales in 2010. On the other hand, ACT Research reports that new trailer inventory is at a four-year low.

What it Means: It is very good news that demand for “spot” freight is growing. Freight has bottomed out and is on its way back, but it won’t be a large gain in 2010. It appears that most industries are now recovering, except for the housing market. This would make it an economic recovery without growth in the housing market. This is similar to having a circus without clowns and animals. It’s not much of a circus and initially it won’t be much of a recovery. Oh I forgot, this recovery does have its clowns. They just aren’t very funny.

Taking Inventory

The latest data shows the Business Inventory-to-Sales Ratio at 1.28 which is back to the “normal” range. Wholesale inventories are also stabilizing. The data from the purchasing managers index shows that inventories are still tightening, but very slowly and that customer inventories are very low. The American Trucking Association says that bloated inventory levels are no longer a drag on trucking. Therefore it appears that inventories have been brought back into line with current sales levels. If we could get an increase in consumer demand, it would cause a positive ripple effect throughout the supply chain.

The Model “T” Update

Now that the transportation market is stabilizing, the timing element of the Model “T” becomes clearer. The model now predicts a bottom in the S & P 500 occurring in September-October (let’s not be concerned about where that bottom is right now). The stock market would then begin to climb very early in 2011.

From My E-mail Box: The economy is so bad that if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.

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