Strong inventory replenishment trend seen through most of 2010

The economy will experience another six months of inventory replenishment before stockpiles reach levels adequate to support the growing needs of a rebounding economy, according to a leading market researcher.

Tobin Smith, founder and chairman of ChangeWave Research, a Rockville, Md.-based firm that surveys thousands of executives across 20 industries, says his firm's findings indicate "another six months of [inventory] restocking to get back to normal levels." Manufacturers are also gaining pricing power and enjoying flat to lower labor costs, a cycle that should continue to feed top- and bottom-line growth, he told attendees at an April 12 breakfast meeting at the annual National Logistics & Distribution Conference in Atlanta.

Smith was also bullish on the nation's economic outlook. He predicted full-year GDP growth of 4.5 percent, and forecast that the recovery will accelerate in the second half of the year and become self-sustaining and durable.

Smith said the United States, unlike other industrialized countries, acts fast to clean its economic house in response to a downturn, which in turn enables the economy to recover with near-equal speed. This scenario is unfolding now, he told the group.

Smith noted that a ChangeWave survey of more than 2,800 respondents conducted during the two weeks ending March 4 found an uptick in corporate sales, the fourth straight survey that showed improvement in that category.

About 22 percent of the respondents said their company's sales will come in above plan in the first quarter, 2 percentage points higher than the previous survey, the firm said. About 32 percent said their company sales would come in below plan, compared to 35 percent in the last survey period.

The survey also found that one in four respondents said their company's second-quarter sales would come in ahead of plan—which represents a 4 percentage point improvement over the previous survey, the firm said. Only 19 percent said that sales would come in below plan, a 1 percentage point improvement from the prior survey results.

Smith, who is better known as a television commentator on financial markets, founded the ChangeWave survey in 2001 to track the real-time buying and selling behavior of thousands of executives representing a cross-section of industries. Smith has touted his survey as having accurately forecast the downturns in 2001 and 2008. Smith says the ChangeWave community now consists of 35,000 members.

A government report released today seemed to bolster Smith's near-term assumptions about inventory accumulation. The Commerce Department said businesses increased their inventory stockpiles for the second straight month in February, a sign that they expect further sales gains.

Business inventories rose 0.5 percent after increasing by an upwardly revised 0.2 percent in January, Commerce data showed. That is the largest jump since July 2008, shortly before the financial crisis worsened considerably.

Smith's comments conflict with the views of some economists, who believe the current inventory replenishment cycle will run its course by mid-year, leading to a second-half slowdown in economic activity. In January, Donald Ratajczak, one of the nation's most respected economists, said growth will slow dramatically in the second half after a robust first six months, leading to full-year GDP growth of 2.5 percent. Ratajczak said economic growth will be dampened by an end to the inventory restocking programs and the waning impact of government stimulus spending.

The economy experienced a near-unprecedented inventory liquidation in 2009 as the financial crisis led to a massive drop in orders, and businesses that couldn't secure short-term financing after credit markets froze began dumping existing stock. U.S. businesses liquidated $305 billion worth of inventories in the second and third quarters alone.