Long-awaited US inventory drawdown spotted

Long-awaited US inventory drawdown spotted

Lower US inventories would be a boon from coastal ports to heartland highways.

Industry analysts say strong truck and steady intermodal traffic in May suggest US retailers are finally drawing down their inventories after two years of a higher-than-average inventory-to-sales ratio, a welcome sign for container lines to trucking companies but a warning that breakneck warehousing demand may slow.

Although May’s inventory-to-sales ratio, the final test for the theory, is still unavailable, the positive traffic figures, steady consumer spending and manufacturing output, increasing inventory costs, and comparatively low transportation costs suggest the turnaround has begun.

The retail industry has been struggling with a significant inventory overhang since the US West Coast longshore labor dispute that disrupted supply chains in late 2014 and early 2015. That overhang was later exacerbated by depressed freight demand internationally and growing pains associated with the rise of e-commerce shipping.

“It’s been negative for so long. The stars seemed to be aligning now. We’ve had a lot of false starts, but this could be it,” Charles W. “Chuck” Clowdis Jr., managing director of transportation for Economics and Country Risk at IHS Markit, told JOC.com.

That does not mean there are not still retailers struggling with bloated inventories and there will not still be shippers with a glut of inventory for some time.

“We see a lot of clients where inventory is just not moving. It’s hard to say how much excess inventory is still sitting out there, where CEOs are not prepared to write that off yet,” Sean Monahan, partner at AT Kearney, said at the launch of the annual State of Logistics Report report at the National Press Club earlier this week

The inventory overhang has persisted so long, Monahan said, largely because inventory carrying costs remain low. “Where did we see a decline in overall logistics costs in 2016? Inventory. Inventory carrying costs declined 3.2 percent overall.”

That decline defied a 1.8 percent increase in storage costs as warehousing capacity tightened, driving up rental rates, he said, but a 7.7 percent reduction in inventory-related financial costs, namely the weighted average cost of capital, pulled overall carrying costs down.

Once inventory costs begin to exceed the cost of transportation, that’s when shippers should begin to draw down inventories. And it seems that could be happening now. Transportation costs are, at the very least, decelerating.

According to Donald Broughton with Broughton Capital, pricing for trucking has been stable. May’s Cass Truckload Linehaul Index increased just 1.1 percent year over year, a continuation of last month’s modest year-over-year pricing growth. Though, it should be noted, April’s 1.3 percent year-over-year uptick marked the end of 13 consecutive months of pricing contraction and May’s pricing was a 1.5 percent sequential decline versus April 2017 and was flat versus May of 2015.

Although intermodal pricing has continued to expand, its pace of growth is slowing. May’s Cass Intermodal Price Index increased 2.2 percent year over year, the eighth consecutive month of expansion. The month’s data, however, suggest that pricing momentum is slowing as growth softened compared with the 3 to 5 percent growth observed earlier this year. 

That deceleration has occurred at roughly the same time volume for both modes has been on the rise. 

American Trucking Associations’ (ATA) advanced seasonally adjusted For-Hire Truck Tonnage Index in May was up 6.5 percent month over month and 4.8 percent year over year. The jump was the largest year-over-year gain since November of last year, according to ATA chief economist Bob Costello.

Meanwhile, total North American intermodal volume in May — that is including domestic and ocean containers — was up 9.4 percent month to month and 9 percent year over year, according to the Intermodal Association of North America. US intermodal volume for the week ending June 17, the most recent figure on record, was up 4.3 percent year over year, according to data from the Association of American Railroads. Intermodal volume for the first 24 weeks of 2017 was also up, some 2.5 percent.

The reasons for May’s strong performance are still murky. Manufacturing output and consumer spending are both on the rise, but they have been for months and only incrementally. The sudden and significant boost in traffic and tonnage on US rails and roads could indicate something else is afoot, according to Clowdis and Costello. 

“The consumer has been there for a while. The consumer spending is not really different. I don’t think that’s the catalyst here. Manufacturing has been solid for a while. So I don’t think that’s it either,” Costello told JOC.com. “ I would almost say probably the bigger effect is the inventory cycle.”

US consumers' spending levels continued to be relatively healthy in May. Consumer spending averaged $104, similar to the $107 average in April, according to Gallup. The latest figure from May also marked the fourth consecutive month that US consumers' spending averaged $100 or higher — a first since the polling firm began tracking consumer spending in 2008.

Economic activity in the manufacturing sector also expanded in May, for the ninth consecutive month, according to a survey of supply executives in the latest Manufacturing ISM Report On Business. The May Purchasing Managers' Index registered 54.9 percent, an increase of 0.1 percentage point from the April reading of 54.8 percent, where a reading above 50 percent indicates that the manufacturing economy is generally expanding and below 50 percent indicates that it’s generally contracting.

If it is indeed an inventory drawdown, the impact should be evident in the May inventory-to-sales ratio, which is not yet available. That figure has held steady at 1.37 for five consecutive months, as of April.

The May figure may not be out, but Costello and Clowdis said they have heard anecdotally that is the case.

“The glut of inventories throughout the supply chain is starting to come down. That’s really starting to help freight volumes,” said Costello. “I’m not saying the correction is completed, but it’s probably getting closer.”

“I talk to the truckers and ask how’s your retail business,” Clowdis said. “A lot of the guys who are hauling goods to the tier 1 retailers — the Neiman Marcuses, the Nordstroms — they’re doing well.”

There is still room for error and as soon as summer is over the peak shipping season could impact an inventory drawdown, as the latest shipments from Asia flood warehouses stateside, but Costello and Clowdis say they are hopeful.

“I think it’s happening. I don’t think we’re completed here with the cycle, but I’m not worried at this time that we reverse course,” Costello said.

Contact Reynolds Hutchins at reynolds.hutchins@ihsmarkit.com and follow him on Twitter: @Hutchins_JOC.