This morning’s data from the Commerce Department underscores that even a mild return of demand could create a massive relaunch of the United States manufacturing engine without much job growth.  The Commerce Department reported that July business inventories fell for the eleventh month in a row.  The drop of 1% beat the Bloomberg consensus estimates of -0.9% as inventories fell to $1.33 trillion.  The sales were up 0.1% versus a 1.1% gain from June, which is actually the first back-to-back gain seen in 2009.

June’s inventory drop was revised to 1.4%. What is important to take in here is that the record inventory drawdowns seen throughout 2009 implies that factories and manufacturers would have to rapidly increase their output.  As businesses start to prepare for more normalcy in their operations, even under a ‘new-normal,’ this manufacturing boost should likely come well in favor of manufacturers.

Even if the end demand does not come on a massive way from Joe Public, many businesses that have been running extremely lean on inventories will need to fill their shelves just to replace inventory.  And if it looks like a solid end of year via Christmas is possible or if the return is expected next year.

To support this notion, the inventory levels are now down to 1.36 months of inventories.  The level was 1.38 months in June.  More recent data has been seen from purchasing managers that also supports this notion, however, the thesis for a sudden and rapid return is still based on very mixed data.  When companies are raising guidance, in most cases it is to levels well under what we’re seeing a year ago.

It really seems as though these inventories have to ultimately get replaced.  On the retail side, that has to be the case as we get closer to year-end… unless that memo went out for everyone to wear their Grinch and Scrooge hats to not buy anything for anyone this Christmas and holiday season.

The return of manufacturing is going to be a far cry from what it was when everyone was borrowing $25,000 at a time against the phantom equity in their house.  But after what we have gone through in recent quarters, the new normal is probably going to feel much better than what we have had endure.

The sad notion is that this may still come without many rehiring efforts.  Employers can probably ask their workers to throw in an extra few hours without much complaint.

JON C. OGG
September 15, 2009

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