Over the last two years, U.S. businesses have been slowly but steadily depleting their stocks of inventories—but in the next few quarters that is set to change.
On the 27th of July, the U.S. Bureau of Economic Analysis issued its first official estimate of second-quarter gross domestic product (GDP). It came in at a 4.1-percent annualized growth rate—the fastest growth rate since the third quarter of 2014. Although some of this strength was attributable to payback from a weak first quarter and an outsized surge in soybean exports, there is no denying that the U.S. economy is churning at a robust pace.
Labor markets have been historically strong; as of the time of this writing, 2.4 million additional people have attained jobs in the last year, the unemployment rate has fallen to 3.9 percent, and the employment cost index for wages and salaries (that is, nominal wages) grew 2.8 percent year-over-year as of the first quarter, the fastest pace in nearly ten years. Household net worth was up 7 percent over the year before in the first quarter, surpassing the US$100 trillion mark for the first time. Survey readings of purchasing managers in the manufacturing sector are robust. Measures of consumer mood are holding at historically lofty levels, and growth of total retail sales in June over the year before was the fastest since early 2012. Across the economy, indicators are consistent with a firm expansion.
Article Figures
[Figure 1] Inventory-to-sales-ratios have trended downwardEnlarge this image
[Figure 2] Business inventory investment to rebuild after lean yearsEnlarge this image
In spite of the second quarter's strong reading on GDP growth, it could have been higher were it not for the continued depletion of inventories. Companies decreased their inventory investment, which dragged down real (or inflation-adjusted) GDP growth by 1.1 percentage points, continuing a pattern of inventory drawdowns that has generally held since mid-2015. Businesses have been gradually decreasing their holdings of inventories ever since a rapid buildup in 2015 that was caused by a "perfect storm" of factors, including a strong U.S. dollar, which decreased the competitiveness of U.S. exports abroad, and a decline in global oil and commodity prices, which reduced spending on equipment and structures in the energy industry. Additionally, labor disruptions occurred at customs ports on the U.S. West Coast, which interrupted the flow of goods and then caused a glut of supply when they were finally resolved in late February 2015.
At the culmination of this inventory buildup, the ratio of overall nonfarm inventories to final sales rose from a post-recession low of 2.28 to 2.45 by the end of 2015. Businesses then began unwinding this buildup. Since the third quarter of 2015, inventory investment has subtracted an average of 0.3 percentage point from annualized GDP growth every quarter. Inventory-to-sales ratios have shrunk, and the nonfarm inventory-to-sales ratio is now the lowest it has been since 2012. (Figure 1 shows inventory-to-sales ratios for nonfarm sectors.)
Numerous factors have contributed to this drawdown. First, holding onto inventory has become relatively pricier. Although economywide inflation is positive and currently accelerating, the cost of goods (as opposed to services) is declining; excluding food and energy, year-on-year growth of the price index for goods has been negative every month since 2012. Businesses therefore have sought to keep as little supply on shelves as possible to avoid making a loss. The growth of electronic commerce, or the "Amazon effect," is also tamping down on inventories, as online suppliers need to maintain less stock than brick-and-mortar establishments to ensure that demand can be met. In the auto sector, inventories of light vehicles were pared down sharply last fall by elevated replacement demand stemming from hurricane damage. Finally, robust consumption has helped to take some supply off of grateful businesses' hands. According to the National Federation of Independent Business, the net percent of small businesses that believed that inventories were too high was zero in June, the lowest proportion since September 2014—a sign of strong sales. The net percent of owners planning to build inventory was the highest since November 2017.
What's on the horizon?
As strong as economic growth has been, IHS Markit believes that the second quarter of 2018 represented the low point of the inventory cycle, and inventory accumulation will grow during the second half of 2018. We believe that current inventory levels are unsustainably low and that the second quarter's overall nonfarm inventory-to-sales ratio of 2.32 is beneath the optimal level. In our forecast as of this writing,real GDP growth overall is estimated to be 3.2 percent for 2018 (from Q4 2017 to Q4 2018), which would make it the best year since 2004. With consumption set to continue at a robust pace—fueled by gains in employment, higher real disposable (after-tax) incomes, and home values—we expect back-to-school retail sales this year to rise 5.2 percent compared to the year before, which would be the best year of growth in school sales since 2011.1 In this environment, businesses must add to their inventory holdings, or shelves of materials and supplies will become uncomfortably bare. For this reason, we expect inventory investment to rise over the next four quarters to contribute an average of five-tenths per quarter to annualized GDP growth. After that, we believe inventory investment will peak in the third quarter of 2019 (at an annualized rate of about US$86 billion chained 2012 dollars) and return to an average of US$60 billion in 2020. (See Figure 2.) This projection of strong inventory investment will stabilize the inventory-to-sales ratio and begin raising it toward our estimate of the optimal level in 2019.
Although our forecast calls for the pickup in inventory investment to progress at a healthy rate, there exist some signs of a possible disruption. Both the Markit PMI (Purchasing Manager Index) and the Institute for Supply Management's reports on manufacturing are currently showing supplier delivery issues. When purchasing managers face supply issues, they often broaden their searches and buy slightly more than they plan to use "just in case." In the past, this has resulted in unsustainable inventory builds like the one seen in 2015—and there is the potential that it could result in a similar boom/bust scenario in the future.
There is another reason why businesses may look to stock up on inventories in the short term: tariffs. The Trump administration, as of this writing, has already enacted tariffs on imported steel, aluminum, washing machines, and solar panels, covering approximately US$57 billion worth of imported goods; it has also targeted a broad collection of goods specifically from China that amounts to a further US$34 billion. These totals are dwarfed by the list of tariffs that are currently under review or threatened, which as of this writing would collectively cover around an additional US$624 billion in goods. Although the existing tariffs were ostensibly intended to protect domestic primary metal producers, more American industries are users than producers of metals—the machinery, farm, construction, and transportation industries, for instance. Tariffs serve to both raise the costs of inputs for these industries and limit their supply; increased costs also filter down to consumers. Already, rising materials costs have become visible in consumer prices; the Consumer Price Index for major appliances grew 5.6 percent versus the year before in June, the most since before the Great Recession.
The fear of tariffs—those enacted and those threatened—means that businesses may anticipate rising costs in the future and significantly build up their inventories in the short run to protect against these price hikes. Both to shore up their bottom line and to ensure adequate supply, businesses in affected industries may double down on inventory investing in the upcoming quarter, shifting this investment earlier and moving it out of the fourth quarter and those following. The consequence would be another boom for inventories, to be followed by another bust—especially if many of the threatened tariffs really do become reality.
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Notes:
1.IHS Markit defines back-to-school retail sales as not-seasonally adjusted retail sales from July through September at all retail locations excluding gasoline stations, motor vehicle and parts retailers, grocery and liquor stores, and restaurants.Â
That result came from the company’s “GEP Global Supply Chain Volatility Index,” an indicator tracking demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses. The October index number was -0.39, which was up only slightly from its level of -0.43 in September.
Researchers found a steep rise in slack across North American supply chains due to declining factory activity in the U.S. In fact, purchasing managers at U.S. manufacturers made their strongest cutbacks to buying volumes in nearly a year and a half, indicating that factories in the world's largest economy are preparing for lower production volumes, GEP said.
Elsewhere, suppliers feeding Asia also reported spare capacity in October, albeit to a lesser degree than seen in Western markets. Europe's industrial plight remained a key feature of the data in October, as vendor capacity was significantly underutilized, reflecting a continuation of subdued demand in key manufacturing hubs across the continent.
"We're in a buyers' market. October is the fourth straight month that suppliers worldwide reported spare capacity, with notable contractions in factory demand across North America and Europe, underscoring the challenging outlook for Western manufacturers," Todd Bremer, vice president, GEP, said in a release. "President-elect Trump inherits U.S. manufacturers with plenty of spare capacity while in contrast, China's modest rebound and strong expansion in India demonstrate greater resilience in Asia."
Even as the e-commerce sector overall continues expanding toward a forecasted 41% of all retail sales by 2027, many small to medium e-commerce companies are struggling to find the investment funding they need to increase sales, according to a sector survey from online capital platform Stenn.
Global geopolitical instability and increasing inflation are causing e-commerce firms to face a liquidity crisis, which means companies may not be able to access the funds they need to grow, Stenn’s survey of 500 senior e-commerce leaders found. The research was conducted by Opinion Matters between August 29 and September 5.
Survey findings include:
61.8% of leaders who sought growth capital did so to invest in advanced technologies, such as AI and machine learning, to improve their businesses.
When asked which resources they wished they had more access to, 63.8% of respondents pointed to growth capital.
Women indicated a stronger need for business operations training (51.2%) and financial planning resources (48.8%) compared to men (30.8% and 15.4%).
40% of business owners are seeking external financial advice and mentorship at least once a week to help with business decisions.
Almost half (49.6%) of respondents are proactively forecasting their business activity 6-18 months ahead.
“As e-commerce continues to grow rapidly, driven by increasing online consumer demand and technological innovation, it’s important to remember that capital constraints and access to growth financing remain persistent hurdles for many e-commerce business leaders especially at small and medium-sized businesses,” Noel Hillman, Chief Commercial Officer at Stenn, said in a release. “In this competitive landscape, ensuring liquidity and optimizing supply chain processes are critical to sustaining growth and scaling operations.”
With six keynote and more than 100 educational sessions, CSCMP EDGE 2024 offered a wealth of content. Here are highlights from just some of the presentations.
A great American story
Author and entrepreneur Fawn Weaver closed out the first day of the conference by telling the little-known story of Nathan “Nearest” Green, who was born into slavery, freed after the Civil War, and went on to become the first master distiller for the Jack Daniel’s Whiskey brand. Through extensive research and interviews with descendants of the Daniel and Green families, Weaver discovered what she describes as a positive American story.
She told the story in her best-selling book, Love & Whiskey: The Remarkable True Story of Jack Daniel, His Master Distiller Nearest Green, and the Improbable Rise of Uncle Nearest. That story also inspired her to create Uncle Nearest Premium Whiskey.
Weaver discussed the barriers she encountered in bringing the brand to life, her vision for where it’s headed, and her take on the supply chain—which she views as both a necessary cost of doing business and an opportunity.
“[It’s] an opportunity if you can move quickly,” she said, pointing to a recent project in which the company was able to fast-track a new Uncle Nearest product thanks to close collaboration with its supply chain partners.
A two-pronged business transformation
We may be living in a world full of technology, but strategy and focus remain the top priorities when it comes to managing a business and its supply chains. So says Roberto Isaias, executive vice president and chief supply chain officer for toy manufacturing and entertainment company Mattel.
Isaias emphasized the point during his keynote on day two of EDGE 2024. He described how Mattel transformed itself amid surging demand for Barbie-branded items following the success of the Barbie movie.
That transformation, according to Isaias, came on two fronts: commercially and logistically. Today, Mattel is steadily moving beyond the toy aisle with two films and 13 TV series in production as well as 14 films and 35 shows in development. And as for those supply chain gains? The company has saved millions, increased productivity, and improved profit margins—even amid cost increases and inflation.
A framework for chasing excellence
Most of the time when CEOs present at an industry conference, they like to talk about their companies’ success stories. Not J.B. Hunt’s Shelley Simpson. Speaking at EDGE, the trucking company’s president and CEO led with a story about a time that the company lost a major customer.
According to Simpson, the company had a customer of their dedicated contract business in 2001 that was consistently making late shipments with no lead time. “We were working like crazy to try to satisfy them, and lost their business,” Simpson said.
When the team at J.B. Hunt later met with the customer’s chief supply chain officer and related all they had been doing, the customer responded, “You never shared everything you were doing for us.”
Out of that experience, came J.B. Hunt’s Customer Value Delivery framework. The framework consists of five steps: 1) understand customer needs, 2) deliver expectations, 3) measure results, 4) communicate performance, and 5) anticipate new value.
Next year’s CSCMP EDGE conference on October 5–8 in National Harbor, Md., promises to have a similarly deep lineup of keynote presentations. Register early at www.cscmpedge.org.
Amid unprecedented challenges, the 2024 State of Logistics Report arrives at a crucial time for the global logistics industry. Now in its 35th edition, it remains a cornerstone for professionals, offering invaluable insights into a landscape marked by economic uncertainty, geopolitical instability, and the escalating impacts of climate change. For decades, this report has guided shippers, carriers, and industry leaders with clarity and strategic foresight in navigating an ever-evolving global economy.
According to the report, the balance between shippers and carriers may shift again in the coming months. Potential rate increases loom, driven by external factors like geopolitical developments and environmental concerns. In such uncertain times, comprehensive, data-driven insights are invaluable.
The report provides a detailed understanding of current market dynamics, grounded in data, expert analyses from CSCMP and Penske Logistics, and insights from leading global companies. This rich compilation helps logistics professionals plan strategies to not only weather the storm but also achieve long-term success.
A key takeaway is the contrast between carriers' challenges and shippers' opportunities. Carriers face high operating costs, weak demand, and excess capacity, increasing financial pressure. Conversely, shippers are capitalizing on lower rates and diversifying carrier relationships to enhance resilience. Some are even monetizing their logistical capabilities, turning challenges into advantages.
The report's importance is underscored by over 60 press outlets globally, garnering significant media attention from the likes of Supply Chain Xchange, DC Velocity, and The Wall Street Journal. Many noted that professionals are adapting to “permanent volatility” by leveraging technology to manage disruptions. Meanwhile, Paul Page of The Wall Street Journal notes that U.S. business logistics costs accounted for 8.7% of GDP in 2023, highlighting the industry's integral role in the economy.
At CSCMP, we take pride in releasing the State of Logistics Report, providing professionals with essential information to make informed decisions in a complex world. Our partnership with Penske Logistics and others ensures the report is comprehensive and forward-looking, offering actionable insights to drive the industry forward.
Looking ahead, challenges persist, but with the right tools, data, and strategies, the logistics industry is well-positioned to navigate this turbulent economy. The 2024 State of Logistics Report serves as both a guide and a call to action, encouraging professionals to think creatively, plan strategically, and act decisively amid uncertainty.
CSCMP remains committed to supporting our members and the broader logistics community. Through collaboration, innovation, and knowledge-sharing, we believe the industry can overcome today's challenges and seize opportunities. The future of logistics is complex, but with the right insights and leadership, it is also filled with promise.
2024 was expected to be a bounce-back year for the logistics industry. We had the pandemic in the rearview mirror, and the economy was proving to be more resilient than expected, defying those prognosticators who believed a recession was imminent.
While most of the economy managed to stabilize in 2024, the logistics industry continued to see disruption and changes in international trade. World events conspired to drive much of the narrative surrounding the flow of goods worldwide. Additionally, a diminished reliance on China as a source for goods reduced some of the international trade flow from that manufacturing hub. Some of this trade diverted to other Asian nations, while nearshoring efforts brought some production back to North America, particularly Mexico.
Meanwhile trucking in the United States continued its 2-year recession, highlighted by weaker demand and excess capacity. Both contributed to a slow year, especially for truckload carriers that comprise about 90% of over-the-road shipments.
Labor issues were also front and center in 2024, as ports and rail companies dealt with threats of strikes, which resulted in new contracts and increased costs. Labor—and often a lack of it—continues to be an ongoing concern in the logistics industry.
In this annual issue, we bring a year-end perspective to these topics and more. Our issue is designed to complement CSCMP’s 35th Annual State of Logistics Report, which was released in June, and includes updates that were presented at the CSCMP EDGE conference held in October. In addition to this overview of the market, we have engaged top industry experts to dig into the status of key logistics sectors.
Hopefully as we move into 2025, logistics markets will build on an improving economy and strong consumer demand, while stabilizing those parts of the industry that could use some adrenaline, such as trucking. By this time next year, we hope to see a full recovery as the market fulfills its promise to deliver the needs of our very connected world.