High Inventory Levels Hinder U.S. Recovery

This story appears in the April 27 print edition of Transport Topics.

Economic recovery for trucking probably still is several months away, based on steep increases in retail and industrial inventories, according to several industry officials and analysts.

Freight volumes are unlikely to grow substantially until inventories fall far enough to stimulate fresh sales and production.

Inventory restocking could help pull the trucking industry out of the doldrums that have sharply depressed freight volumes and tonnage during the recession, observers said, but the ratio of inventories to sales is near an eight-year high.

“Inventories are becoming bloated,” said John White, president of U.S. Xpress Inc., a combined truckload, expedited and contract carrier. That means “we may not be at the bottom” of the economic cycle yet, he said.

“If you look at inventory levels in terms of real dollars, they are at significantly reduced rates,” White said April 21 in his state-of-the-industry remarks at the ALK Technology transporta-tion technology conference in Princeton, N.J. “Unfortunately, total inventory-to-sales ratio [was] at its highest since 2001.”

According to Commerce De-partment data, the inventory-to-sales ratio hit 1.45 in January for the worst performance since April 2001. Industrial production plummeted 22% on an annual basis in the first quarter.

The spike in the inventory-to-sales ratio suggests that inventory is growing more rapidly than sales, or that sales are falling relative to the amount of inventory.

White said some of U.S. Xpress’ largest customers have told him they intend to keep working their inventories down before they order new goods.

USA Truck Inc. said when first-quarter earnings were announced that there was “a severe contraction in freight volume resulting from the current economic recession and from inventory reductions by both manufacturers and retailers.”

The recession is driving down shipments faster than inventory is being drawn down, Dave Huether, chief economist of the National Association of Manufacturers, told Transport Topics on April 22. “I suspect that will continue for the next three or four months. The inventory-to-sales ratio has skyrocketed,” he said.

Retailers shared Huether’s view.

“At this point we’re not seeing any indication that this [restocking] is happening,’” said Jon Gold, vice president of supply chain and customs policy for the National Retail Federation. “We’re still seeing consumer demand down. We’re hoping to see the signs of recovery later this year,” he said.

Trucking industry experts agreed.

“The supply chain is trying to reduce inventories further, and is not restocking,” said Bob Costello, chief economist of American Trucking Associations. “Inventories are too high for the current level of sales. The dollar amount of inventories has fallen. . . . The problem is sales fell as much or more.”

In fact, the U.S. Census Bu-reau said total business inventories declined 7.2%, or about $100 billion, from October to February, and total manufacturing inventories fell 6.4% in that period. The pace of the inventory decline slowed in February, causing the inventory-to-sales ratio actually to improve slightly to 1.43 from 1.45, but analysts said that probably wasn’t reason for much encouragement.

“While these [inventory] re-ductions do not sound dramatic, it is rare for absolute inventories to be reduced at all,” Stephens Inc. analyst Thom Albrecht wrote in an April 15 report. “Compared to the sales declines many companies and sectors have experienced, the reductions are probably not sufficient yet to start a strong inventory replenishment cycle.”

Stifel, Nicolaus & Co. analyst John Larkin agreed.

“It may be three to six months, if not longer, to work through this particular [inventory] glut and get back down to the average levels we have seen since 2005,” Larkin said.

“Retail inventories appear to be a little bit bloated, despite 50%- to 75%-off discount sales,” Larkin added. “Many retailers are reducing their orders for this season as much as 20%, which obviously has a hugely negative impact on freight volumes.”

A warehouse industry operator confirmed others’ views.

“We are seeing what the rest of the country is seeing,” said Richard Murphy, president of Murphy Warehouse Co. of Minneapolis, which manages 2.4 million square feet and also operates a brokerage that handles 6,000 loads a year. “Most of the facilities are full, and order activity has slowed down. Most people are not replenishing their stock when they would traditionally be doing that.”

“From our perspective, we have not seen a slowdown like this since the summer of 2001,” Murphy added. “We know from our transportation brokerage that there are many, many carriers that are hungry for loads. There is not a lot of freight out there.”

“In the short term, there is no catalyst to turn things around,” Huether said. “You are going to have to get some slowdown in the decline or a pickup in manufacturing to get some positive inventory flows. We are going to have to get through more declines in inventories before we see increases in shipments.”

The latest signals on inventory levels come as the U.S. economy has shown occasional, faint hopeful signs such as higher levels in the long-suffering housing market.

“There are indications that things are starting to get less worse,” Huether said.

Transport Topics Magazines Editor Tom Strah contributed to this story.