Inventories Won’t Kill Growth 


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Inventories Won’t Kill Growth



True – a buildup in stocks had been boosting GDP. We are paying the price now.

But the drawdown shouldn’t cause a recession.


It’s no wonder economists are paying close attention to the latest inventory readings, now that economy is clearly slowing down: Inventory changes are the little numbers that can cause big swings in business cycles. Seemingly minor fluctuations in the stocks that companies keep on hand have tended in the past to reverberate through the economy, pushing expansions over the top and exacerbating slowdowns – sometimes even causing recessions.

Companies were accumulating inventories at a fast $52 billion rate in the first quarter this year, Had they not, GDP growth would have been slower than the 2.7% reported for the quarter. Since then, an inventory correction has begun, adding to the economy’s weakness. The big question is: Will it turn this economic downshift into a full-fledged stall? Happily, a close look at the numbers and a business behavior suggests that it won’t.

The plot line of the typical inventory-cycle saga reads something like this. As an economic expansion comes off its peak, consumers stop buying so much. Since there is a time lag between this spending slowdown and industry’s commensurate cuts in production, stocks build. Eventually businesses realize they need to slow output to match falling sales. But by then the backlog of unsold goods must be dealt with too, so production is cut even further. “It’s like adjusting the hot water in the shower,” says Fleet Financial’s chief economist, Gary L. Ciminero. “You end up alternately scalding and freezing yourself if you don’t take account of the lag time.” As the process is repeated economy-wide, the effects ripple throughout the supply chain. The result is the classic inventory cycle, which in some respects is what we’ve been seeing in the past year.

Businesses have once again had to scramble to adjust to a drop in demand – “We were caught off guard,” says Ron L. Jones, president of Masco Corp.’s Home Furnishings Group, which makes furniture, decorative fabrics, and accessories. “We were expecting a general slowing, but nothing as quick or as precipitous as this has been.” Inventories for all industries actually started building up early in 2000 as a planned response to cheery forecasts of increasing demand. But when consumer spending slowed last year – surprising nearly everyone – industrial production kept pushing ahead. The buildup in inventories added significantly to overall growth from mid-2000 through the first quarter of this year.

Why shouldn’t you panic about this latest Great American Stockpile? First of all, the buildup has been confined mostly to a few industries. One is furniture and home furnishings. Like Masco, companies in this sector have been hit by the recent slump in the housing market. Another – which has really racked up inventory – is the auto industry. Autos alone accounted for roughly a quarter of the total current inventory accumulation, according to Jose Rasco, an economist at Capital Investments International. Car companies now have an 80-day supply of cars and light trucks; normally, they shoot for 60 days. (Each “day” represents around 40,000 unsold cars.) What happened? Independent auto analyst Susan Jacobs says the Big Three were simply too optimistic about the underlying appetite for cars and light trucks. With prices rising and pent-up demand satisfied, people are staying away from showrooms in droves.

A more important dampening influence on this inventory cycle is the efficiency of American industry. After years of investing in inventory management systems like just-in-time, businesses are now able to respond quickly once they detect a change in demand. And with the proliferation of computerized tracking systems, they see those changes more quickly than they did even a few years ago. The shortened sales-production lag time makes for a shorter arc in the inventory pendulum’s swing. As WEFA Group managing director Kurt Karl puts it:”The leaner the inventories, the shallower the cycles.” A good measure of the new reality, says Maury Harris, Paine Webber’s chief economist, is the ratio of inventory to sales This number which essentially represents how many months’ supply of inventories there is at current sales rates varied between 1.5 and 1.6 during the 1980s expansion. After dropping to nearly 1.4 this time around, it has bumped up recently to about 1.45, but that’s still historically low.

The fact that businesses were caught flat-footed at all proves that theses systems aren’t perfect. “When something sharply zigs when it’s supposed to zag,” says Fleet’s Ciminero,” inventory cycles get created even if you have inventory-control systems.” But the traditional whipsaw effect has been tamed. The quick response can be seen right now. In an effort to get output back in line with demand, industrial production has already fallen for three consecutive months, and the latest survey data predict further declines.

Another mitigating factor is that businesses see few signs of inflation. Increases in parts and raw material prices give companies an incentive to stock up now or pay higher prices later. Back in the early 1980s when inflation was running in double digits, industry, hoarded inventories contributing mightily to the volatility of that era. With little inflationary pressure today, businesses don’t have to worry. A smaller but still significant reason this inventory cycle is remaining muted, says Rasco, is that a good portion of the mountain of inventories is imported. As long as the goods aren’t produced over here, no one gets hurt stateside when production is cut to bring it in line with demand.

The question now is, when will the inventory correction be over? If it stretches through to the fall, says Rasco, start sweating. If businesses, cutting production all the time, still find there inventories out of whack by the third quarter, that may be more deceleration than this hoped-for soft landing can bear.

Most economists, Rasco included, figure businesses will sort out their supply and demand well before then, helping the economy settle into a sustainable growth path. Paine Webber’s Maury Harris the auto industry’s inventory drawdown is nearly over as the effects of dealer rebates and production cutbacks work through the system. Apart from autos, the outlook depends in large part on what happens to the housing market, and with mortgage rates falling, prospects are good.

By early fall, says Harris, inventories should resume a sustainable rate of accumulation of about $25 billion a year, consistent with GDP growth in the 2.5% to 3% range that most economists think will prevail through the end of 2000.


 


By James Aley

Fortune

Vocabulary

 

1. inventories (to build up, accumulate, ТМЗ (наращивать, накапливать

hoard inventories) ТМЗ)

2. inventory readings показатели, данные о ТМЗ

to have stocks on hand иметь запасы в наличии

3. time lag, sales-production lag time временной лаг; лаг между

изготовлением продукции и её

продажей

4. backlog of unsold goods запас непроданной продукции

5. to confine the buildup to a few industries ограничивать наращивание

(запасов) несколькими отраслями

6. housing market рынок жилья

7. inventory management system система управления ТМЗ

8. lean inventories оптимальный объём запасов

9. the ratio of inventories to sales отношение ТМЗ к объёму продаж

10. sales rates темпы реализации продукции

11. to get output in line with demand привести объём производства в

соответствие со спросом

Assignments

I. Suggest the Russian for:

  1. minor fluctuations
  2. full-fledged stall
  3. plot line
  4. to match falling sales
  5. supply chain
  6. cheery forecasts
  7. to be confined to a few industries
  8. slump in a housing market
  9. an 80-day supply of cars
  10. a dampening influence on the inventory cycle

 

II. Find the English for:

  1. накопление запасов
  2. сокращение производства
  3. снижать темпы производства
  4. принимать ч-л в расчёт
  5. падение спроса
  6. рост спроса
  7. ¼ всех накопленных запасов приходится на автомобили
  8. цифра, выраженная двузначным числом
  9. сокращение ТМЗ
  10. ставка по закладной

III. Explain in English the following phrase from the text:

«When something sharply zigs when it’s supposed to zag, inventory cycles get created

even if you have inventory-control systems.»

IV. Speak on the interrelation between:

1). the volume of inventories and economic expansion

2). inflation rate and inventory changes

V From the article “”The limits of outsourcing”

a) suggest the Russian for:

outsourcing; lighter-footed rivals; “pull” business model; paragon of modern supply chain; unwanted outsourcing capacity; to earmark (capacity); it is arguable that…; firesale prices; …they are reduced to mothballing their fleet; capital expenditures; to offload the headache of manufacturing; to avoid economic exposure.

b) give the English equivalents for:

предприятие, имеющее большой объём ТМЗ; состязаться (следовать примеру); столкнуться с проблемой; ограждать от резких колебаний в спросе; запас ТМЗ; списывать (активы); увеличиться в 10 раз; активная реклама; немедленное удовлетворение (спроса); происходить, возникать в результате ч-л.

 

VI. Answer the questions; using your answers as guide-posts sum-up in writing the contents

of the article in Russian:

1. What did the inventory problem stem from?

2. What business model did some companies come to use to avoid it?

3. What does the experience of some inventory-free businesses testify to?

4. How can the practice of outsourcing be improved?

5. Why should manufacturers attach importance to such factors as instability of demand and the failure to recognize and react to it promptly?

6. What should modern manufacturers bear in mind to provide instant gratification?

7. What are the risks of outsourcing?

 

The limits of outsourcing



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