With a breakout performance by the U.S. economy looking unlikely, business inventories are still running lean—but stimulative policies could provide a boost.
Several indicators suggest reason for some optimism about the U.S. economic outlook. The economy is entering its ninth year of expansion, the third-longest expansion on record so far. The unemployment rate in each month from March through July of this year fell solidly into the range considered indicative of "full employment." And measures of consumer and business confidence remain at or near high-water marks not seen for a decade or more.
Nevertheless, economic growth is still failing to impress. Indeed, this recovery has been rather subpar in terms of real gross domestic product (GDP) growth. From the first quarter of 2010 through the second quarter of 2017, the average annual rate of inflation-adjusted growth of U.S. GDP was just 2.1 percent. By contrast, during similar portions of the previous three expansions, real GDP managed an average annual growth rate of near or above 3.8 percent—substantially stronger than the current anemic figure. Additionally, throughout the recovery following the Great Recession (December 2007-June 2009), the 10-year moving average of real GDP growth has been gradually decreasing rather than seeing a V-shaped rebound.
[Figure 2] Stocks of inventories adjusted for inflationEnlarge this image
Aftermath of the inventory buildup
In spite of a burst of enthusiasm in the global equities and commodities markets after the U.S. election in November 2016, the first quarter of 2017 brought uninspiring news for the "hard" economic indicators (such as strong real GDP growth and rising real wages) that reflect objective, measurable reality. The first quarter's real GDP growth rate managed a paltry 1.2 percent, and the second quarter's 2.6 percent rate was also slightly slower than most analysts expected.
In early 2016, when real GDP growth also appeared to be sputtering, one culprit was a drawdown of inventories by businesses. In general, businesses try to adjust the supply of goods on hand to match anticipated demand levels. A buildup of inventories, such as is often seen during recessions, can be a function of an unanticipated demand shortfall. But the inventory buildup that started in 2014, although unwanted, was not caused by a sudden drop-off in domestic demand, but rather by a "perfect storm" of other factors. These included a strong U.S. dollar, which decreased the competitiveness of U.S. exports abroad; a decline in global oil and commodity prices, which reduced spending on equipment and structures in the energy industry; and labor disruptions affecting ports on the U.S. West Coast, which interrupted the flow of goods and caused a glut of supply when it was finally resolved in late February 2015. As businesses worked through this inventory overstock, the slowing inventory investment subtracted between 0.2 and 0.7 percentage points from real GDP growth for five consecutive quarters through the second quarter of 2016.
Once the inventory drawdown was over, businesses remained cautious about reinvesting in inventories. Rather than resuming an upward trend, gross stocks of inventories for retailers, wholesalers, and manufacturers stayed roughly flat—and even declined in the first quarter of 2017, knocking around 1.5 percent off of real GDP growth. In general, retailers are better able to adapt to unexpected changes in inventory levels than are wholesalers or manufacturers—a pattern reflected in the stability of the inventory-to-sales ratios for these sectors. From its peak to its lowest subsequent point, the ratio of inventories to sales fell 2.7 percent for the retail sector, compared with 5.9 percent for wholesalers and 4.2 percent for manufacturers. One notable exception was auto dealers, which have been having trouble moving cars off lots. But most businesses are running leaner; inventory-to-sales ratios remain substantially lower than they were at their early-2016 peaks. (See Figure 1.)
A major reason why businesses have been slow to build up inventories is fierce competition, which has led to tight margins and price discounting. As American manufacturers are increasingly forced to cut costs to compete, the price of goods has declined. And although headline U.S. price inflation continues to creep up, this disguises the fact that there are really two types of consumer price inflation at work: goods and services. The price of services continues to grow at a brisk clip—between 2.2 and 3.2 percent in year-on-year terms during the last five years—while the index of the price of core commodities has been solidly in the negative in every quarter since the second quarter of 2013. During the second quarter of 2017, the index of core commodities prices posted its largest year-on-year decline (0.7 percent) since 2007.
With goods prices contracting, businesses are painfully aware that any inventory sitting on shelves is producing a loss. The increased cost of holding inventories ramps up the pressure to minimize their inventory stocks. Indeed, during the inventory buildup of 2014-2015, this effect was enough to produce a noticeable impact on corporate profits.
The growth of the digital economy is also squeezing inventory accumulation, particularly for retailers. E-commerce retail sales are on a tear, gobbling up market share from brick-and-mortar establishments at an impressive rate. In the second quarter of 2017, e-commerce retail sales grew 16.2 percent year-on-year, making up 8.9 percent of total retail trade (total retail sales less restaurants), and it has grown by a yearly rate of at least 12.8 percent since the fourth quarter of 2009. Meanwhile, sales at department stores are dwindling. As digital retailers need to maintain less inventory to ensure that demand can be satisfied, e-commerce has become another source of downward pressure on retailers' inventories.
The inventory outlook
The outlook for inventory investment, which reflects that of both the U.S. and global economies, is generally positive. IHS Markit expects real GDP to increase at annual rates of around 3.1 percent in the third quarter of this year and 2.4 percent in the fourth. Growth will be broadly based, with solid gains in consumer spending, residential investment, business fixed investment, and exports. Consumer spending will remain an engine of U.S. economic growth, supported by still-impressive levels of consumer confidence and by rising employment, real disposable incomes, and household wealth. Record levels of household net worth will spark strong growth in spending on durable goods.
After stalling in 2016, capital spending revived in the first half of 2017. Expanding global markets, relatively low financing costs, an improving regulatory climate, and the resurgence in the U.S. domestic oil industry are driving an upturn in investment. Business fixed investment saw its strongest jump since mid-2014 during the first quarter, boosted by over-the-top real spending growth on mines and wells (up a whopping annualized 272 percent).
International trends are also supportive of inventory development. Although the broad-based dollar exchange-rate index increased by about 5 percent between the November election and the end of 2016, it has since lost those gains, and the dollar has further to fall. It will likely lose ground as business cycles in other economies catch up with the United States—which should give U.S. exports a second wind. And after giving back their gains of the Trump rally, global commodity prices now appear to be situated on a stable foundation.
There is considerably greater uncertainty regarding the U.S. growth outlook for 2018, which will depend on the nature of policies coming out of Washington. The Trump administration and the Republican-led Congress have expressed their intention to cut corporate taxes, reduce personal income taxes, remove regulations, and introduce more pro-growth policies. In spite of political turbulence and continued setbacks to parts of this reform agenda, the IHS Markit view is that modest fiscal stimulus (personal and corporate tax cuts, along with a boost in infrastructure spending) is still possible. If carried out, it will help real GDP growth to accelerate to 2.7 percent next year. As a function of this quickened growth pace, we forecast inventory investment to pick up, with retailers adding 1.9 percent to their inventories between the fourth quarters of 2017 and 2018, and wholesale inventories adding 1.3 percent. (See Figure 2.) However, if stimulus is not forthcoming, we estimate that real GDP growth will be approximately 0.4 percentage points lower in 2018, when the full impact of such stimulus would likely be felt.
The good news is that the fundamentals of the U.S. economy remain solid enough that, even without any stimulus, it can amble along at a decent pace for the next year or two—and inventories should go along for the ride.
The launch is based on “Amazon Nova,” the company’s new generation of foundation models, the company said in a blog post. Data scientists use foundation models (FMs) to develop machine learning (ML) platforms more quickly than starting from scratch, allowing them to create artificial intelligence applications capable of performing a wide variety of general tasks, since they were trained on a broad spectrum of generalized data, Amazon says.
The new models are integrated with Amazon Bedrock, a managed service that makes FMs from AI companies and Amazon available for use through a single API. Using Amazon Bedrock, customers can experiment with and evaluate Amazon Nova models, as well as other FMs, to determine the best model for an application.
Calling the launch “the next step in our AI journey,” the company says Amazon Nova has the ability to process text, image, and video as prompts, so customers can use Amazon Nova-powered generative AI applications to understand videos, charts, and documents, or to generate videos and other multimedia content.
“Inside Amazon, we have about 1,000 Gen AI applications in motion, and we’ve had a bird’s-eye view of what application builders are still grappling with,” Rohit Prasad, SVP of Amazon Artificial General Intelligence, said in a release. “Our new Amazon Nova models are intended to help with these challenges for internal and external builders, and provide compelling intelligence and content generation while also delivering meaningful progress on latency, cost-effectiveness, customization, information grounding, and agentic capabilities.”
The new Amazon Nova models available in Amazon Bedrock include:
Amazon Nova Micro, a text-only model that delivers the lowest latency responses at very low cost.
Amazon Nova Lite, a very low-cost multimodal model that is lightning fast for processing image, video, and text inputs.
Amazon Nova Pro, a highly capable multimodal model with the best combination of accuracy, speed, and cost for a wide range of tasks.
Amazon Nova Premier, the most capable of Amazon’s multimodal models for complex reasoning tasks and for use as the best teacher for distilling custom models
Amazon Nova Canvas, a state-of-the-art image generation model.
Amazon Nova Reel, a state-of-the-art video generation model that can transform a single image input into a brief video with the prompt: dolly forward.
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Grocers and retailers are struggling to get their systems back online just before the winter holiday peak, following a software hack that hit the supply chain software provider Blue Yonder this week.
The ransomware attack is snarling inventory distribution patterns because of its impact on systems such as the employee scheduling system for coffee stalwart Starbucks, according to a published report. Scottsdale, Arizona-based Blue Yonder provides a wide range of supply chain software, including warehouse management system (WMS), transportation management system (TMS), order management and commerce, network and control tower, returns management, and others.
Blue Yonder today acknowledged the disruptions, saying they were the result of a ransomware incident affecting its managed services hosted environment. The company has established a dedicated cybersecurity incident update webpage to communicate its recovery progress, but it had not been updated for nearly two days as of Tuesday afternoon. “Since learning of the incident, the Blue Yonder team has been working diligently together with external cybersecurity firms to make progress in their recovery process. We have implemented several defensive and forensic protocols,” a Blue Yonder spokesperson said in an email.
The timing of the attack suggests that hackers may have targeted Blue Yonder in a calculated attack based on the upcoming Thanksgiving break, since many U.S. organizations downsize their security staffing on holidays and weekends, according to a statement from Dan Lattimer, VP of Semperis, a New Jersey-based computer and network security firm.
“While details on the specifics of the Blue Yonder attack are scant, it is yet another reminder how damaging supply chain disruptions become when suppliers are taken offline. Kudos to Blue Yonder for dealing with this cyberattack head on but we still don’t know how far reaching the business disruptions will be in the UK, U.S. and other countries,” Lattimer said. “Now is time for organizations to fight back against threat actors. Deciding whether or not to pay a ransom is a personal decision that each company has to make, but paying emboldens threat actors and throws more fuel onto an already burning inferno. Simply, it doesn’t pay-to-pay,” he said.
The incident closely followed an unrelated cybersecurity issue at the grocery giant Ahold Delhaize, which has been recovering from impacts to the Stop & Shop chain that it across the U.S. Northeast region. In a statement apologizing to customers for the inconvenience of the cybersecurity issue, Netherlands-based Ahold Delhaize said its top priority is the security of its customers, associates and partners, and that the company’s internal IT security staff was working with external cybersecurity experts and law enforcement to speed recovery. “Our teams are taking steps to assess and mitigate the issue. This includes taking some systems offline to help protect them. This issue and subsequent mitigating actions have affected certain Ahold Delhaize USA brands and services including a number of pharmacies and certain e-commerce operations,” the company said.
Editor's note:This article was revised on November 27 to indicate that the cybersecurity issue at Ahold Delhaize was unrelated to the Blue Yonder hack.
The new funding brings Amazon's total investment in Anthropic to $8 billion, while maintaining the e-commerce giant’s position as a minority investor, according to Anthropic. The partnership was launched in 2023, when Amazon invested its first $4 billion round in the firm.
Anthropic’s “Claude” family of AI assistant models is available on AWS’s Amazon Bedrock, which is a cloud-based managed service that lets companies build specialized generative AI applications by choosing from an array of foundation models (FMs) developed by AI providers like AI21 Labs, Anthropic, Cohere, Meta, Mistral AI, Stability AI, and Amazon itself.
According to Amazon, tens of thousands of customers, from startups to enterprises and government institutions, are currently running their generative AI workloads using Anthropic’s models in the AWS cloud. Those GenAI tools are powering tasks such as customer service chatbots, coding assistants, translation applications, drug discovery, engineering design, and complex business processes.
"The response from AWS customers who are developing generative AI applications powered by Anthropic in Amazon Bedrock has been remarkable," Matt Garman, AWS CEO, said in a release. "By continuing to deploy Anthropic models in Amazon Bedrock and collaborating with Anthropic on the development of our custom Trainium chips, we’ll keep pushing the boundaries of what customers can achieve with generative AI technologies. We’ve been impressed by Anthropic’s pace of innovation and commitment to responsible development of generative AI, and look forward to deepening our collaboration."