Monday, May 25, 2015

Inventory to Sales Ratio is Not Showing a Pretty Picture - Macroeconomic Monday is Back!

All the data I am seeing is indicating some real softness in the economy. At first, people thought it was the weather and then we went to the port strike.  However, now we are starting to see some real convergence of data pointing to a slower economy:

Inventory to Sales Ratio:

As we can see by the FRED graph, this has been on a climb however the slope has increased.  Essentially, this is indicating that inventory is building in the supply chain and there is not adequate sell through.  Every time this indicator has turned this way, we have seen ultimate softness (as companies work to right size the inventory) and this means softness in the freight markets:

You can see that this is nothing like the spike during the "great recession" however you also clearly can see that when this goes up, recessions do follow (or this is just an indicator of the recession as it happens.

ATA Truck Tonnage Drops in April; Off 5.3% from High in January:

The ATA freight tonnage index peaked in January and has been struggling ever since.  While increasing 1% over prior year, it is down 5.9% against previous month, down 5.3% against high in January and indications are the freight index will stay soft.  This will drive lower expectations for GDP and, once again, our dream of a year above 3% GDP is starting to fizzle.

While the CASS freight index is still showing some healthy gains in pricing, I really attribute that to the successful "fear mongering" of the carrier base.  If buyers of freight truly were objective about the data, they would aggressively be seeking price decreases and not stand for any price increases.  This will utimately turn down once the shippers realize what is happening and once the buyers start getting pressured by their managers to adjust the cost basis to reflect what is really happening.

Manufacturer's Alliance for Productivity and Innovation (MAPI) Adjusts Manufacturing Growth to 2.5% From Previous Estimate of 3.5%.

This is a big movement and they attribute this to four key areas from their report:
  1. Oil and natural gas prices collapsed, causing a sudden contraction of the energy supply chain.
  2. The strong U.S. dollar reduced growth, a result of cheaper imports to the U.S. and U.S. exports becoming more expensive to foreign buyers, as well as deflation pressure on exports.
  3. Consumers spent some of their fuel savings in the fourth quarter of 2014.
  4. The inventory-to-sales ratio rose sharply in the first quarter, while the inventory runoff in the second quarter slowed production growth
The interesting item of all of this is in item #3 above.  Where is all the money gone that the consumer is saving due to low fuel prices?  I think it is has gone into the bank or the continued deleveraging of households - meaning people are still not buying.

Without some real big changes, I think we are in for another "sputter" and halt type economy - we are far to used to this now.  

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