Inventory Replenishment

The new year started off with a bang as far as the stock markets are concerned with the ongoing increase in manufacturing causing renewed optimism. However, there remain lingering concerns that the increases are related to inventory replenishment and that once that is complete, manufacturing will stagnate again.

Of course this ignores the fact that retailers and wholesalers learned a bitter lesson after the contraction we saw at the end of 2008. They have adjusted to keep inventories lean. Now, we have finished the holiday season and are awaiting reports but preliminary data indicates that sales were good. They exceeded last year but have not returned to the levels of say 2007. Now, the stores all went into this season leaner and for most, the sales level should result in improved profitability. Of course there will be winners and losers, there always are, but in general, stores were prepared for a difficult holiday season and the one we got should be a profitable one.

Similarly, no one is rushing out to buy a ton of potentially wasteful inventory. Yes, they are buying stock but no one, or at least almost no one, thinks sales are going to be as robust as they were during the boom. So, if the belief is that retailers and wholesalers have forgotten the lesson of 2008 and are stocking up to some lofty level I would like to see some evidence. The speculation seems to be just that speculation. I believe the inventory rebuild is going to levels that should be supported by the current economic conditions, high unemployment and wealth degradation. To think otherwise is to basically assume our business people are essentially idiots.

In fact, if the economy is better than most of the business people think, we are likely to see shortages of some products leading to increased production, not less.