Build-up caused by unexpected slump in US demand, hike in energy prices
(PARIS) Just-in-time inventories are turning into just-too-much at companies around the world.
From Dodge Ram trucks to Sanyo mobile phones, unsold goods are piling up around the world. That may become a drag on global economic growth as companies idle workers and production lines to clear out the excess.
Factory inventories worldwide rose faster than sales last quarter for the first time since 2001, according to economists at UBS AG in London. Behind the build-up: an unexpected slowdown in demand, especially in the US, brought on by the mid-year surge in energy prices and a housing slump.
Reducing the glut will be painful, said Joseph LaVorgna, chief US economist at Deutsche Bank Securities Inc in New York. 'The faster companies clear out inventories, the bigger the hit to the economy,' he said. 'This could ripple through the economy, to jobs and consumer spending.'
Companies as diverse as Rotterdam-based steelmaker Arcelor Mittal, San Francisco-based retailer Williams-Sonoma Inc and dollmaker Zapf Creation AG of Roedental, Germany, are cutting production and orders to bring stockpiles in line with lower sales.
The risk is that the cutbacks start to feed on themselves, damping demand further through slower job growth and investment. Already, economists including Jan Hatzius, chief US economist at Goldman Sachs Group Inc in New York, and Peter Hooper, chief economist for Deutsche Bank Securities, have reduced forecasts for economic growth to reflect lower output. Central bankers brush aside concerns about the slowdown, arguing that the production cutbacks will be self-correcting rather than self-perpetuating, allowing companies to raise output again once they work off the excess supplies. Federal Reserve chairman Ben Bernanke said recently that US economic growth will strengthen next year as the housing slowdown and car production cutbacks exert less of a drag on the economy. Bank of Japan governor Toshihiko Fukui said that a build-up of high-tech product stockpiles in his country was 'temporary', and that monetary policy would not be 'restricted' by it. European Central Bank president Jean-Claude Trichet has signalled the bank will raise interest rates again this week, even after the French economy unexpectedly stagnated in the third quarter as companies sought to reduce inventories. The adoption of just-in-time inventory management has enabled companies over the last 15 years to shrink the stockpiles they hold in relation to their sales. But it has not eliminated unwanted bulges in inventory entirely, especially when economic growth and demand slow abruptly, said Nariman Behravesh, chief economist at Global Insight Inc in Boston. That was what happened in mid-2000, when manufacturing companies found themselves with too much inventory as exports and capital goods spending tailed off unexpectedly. Nine months later, in March of 2001, the economy slipped into recession. This time, companies have been caught by the steeper-than-expected slump in the US housing industry and the surprise mid-year run-up in energy prices that undercut demand. The problem seems most acute in the US, where the economy grew at an annual rate of 2.2 per cent in the third quarter of 2006, down from 2.6 per cent in the second quarter. Growth would have been even slower were it not for a US$58 billion annualised jump in inventories. Roger Kubarych, senior economic adviser at HVB America Inc and a former Fed economist, said the drag on the economy from inventory cutbacks may last through next year as commodity prices level off, reducing the incentive for companies to stockpile raw materials. Technology companies in Asia are feeling the fallout as the US economic slowdown ripples through the global corporate supply chain. - Bloomberg
