Has the great inventory rebuild run its course?

If the numbers pouring forth from various sources are any indication, the great inventory rebuild of 2009-2010, which fueled the nation's economic recovery, could be coming to an end.

The latest indication of an inventory slowdown came today with the release of a monthly index that monitors truck drivers' diesel fuel purchases. That measure, the Ceridian-UCLA Pulse of Commerce Index (PCI), showed a sequential decline of 0.9 percent in May, following a 0.5-percent drop in April. The index, which tracks drivers' fuel card swipes as they transport raw materials as well as intermediate and finished goods to businesses and consumers, has declined in every month this year except March and has fallen in eight of the past 10 months.

Ed Leamer, an economist at UCLA's Anderson School of Management who directs the report in conjunction with payroll giant Ceridian Corp., said in a statement that the economic recovery started in July 2009 but lasted only until the following June. Since then, he said, the economy has "been idling, not powering forward."

One bright spot, Leamer said, is that the May results were about equal with May 2010, the strongest month of last year. "Nevertheless, the [May 2011 index] showed no growth, and this is another indication that the economy is stuck in neutral," he said.

Craig Manson, senior vice president at Ceridian, said the 2009-10 recovery was sparked by a rapid replenishment of inventories as companies rebuilt stocks that had been pared sharply during the recession. Restocking activity has now moderated to normal levels, but with the depressed construction and housing industries unable to offset the slowdown in inventory building, the economy has effectively stalled, Manson said. The index's authors have not made any forecasts for the rest of the year, but they don't expect a return to recessionary conditions, he added.

Little relief in sight
The impact of inventory contraction is also reflected in a sobering May 31 report from New York City transport investment firm Wolfe Trahan. In the report, the firm said its prediction several months ago of just 1 percent "freight GDP" growth—which would be about half of even the most downbeat projections for overall GDP growth this year—"no longer feels quite so unrealistic."

The firm, co-run by long-time transport analyst Ed Wolfe, wrote that shipping volumes in 2010 were stimulated by "faster inventory turns" as shippers scrambled to move goods to market and replenish depleted stocks. However, the oil price spike that began late last year has since compelled shippers to cut transportation costs and preserve inventory, the firm said. With an inventory slowdown turning into a potential "headwind" for volumes sometime this year, Wolfe Trahan expects traffic flows to decelerate on a year-over-year basis.

Shippers shouldn't expect much relief on the pricing front either, according to a first-quarter shipper survey conducted by the firm. Shippers polled said they expect a 9-percent increase in their 2011 shipping budgets over 2010, with fuel surcharges accounting for half of that increase. The same poll in the fourth quarter had shippers projecting a 6.5-percent year-over-year increase.

A monthly index published by freight audit and payment firm Cass Information Systems Inc. showed a 0.2-percent decline in May shipments over April figures, as orders and shipments of durable goods flattened out. Year-over-year shipment growth stood at 9.6 percent in May, down sharply from the 12.3-percent year-over-year gains reported in April, said Cass. The Bridgeton, Mo.-based firm bases the index on the expenditures and shipments of 400 clients.

Roslyn Wilson, author of the Cass report as well as the annual "State of Logistics" report to be released next week in Washington, D.C., said retailers concerned about the impact of high unemployment and rising food and fuel costs on consumer demand for finished goods have grown increasingly cautious about inventory restocking. That, in turn, has depressed supplier activity and has caused a downshift in new orders, Wilson said. She expects this sluggish pattern to persist for the rest of the year.

While shipping costs have risen, they are not high enough to be a deterrent to shipping, Wilson added. One grain of good news for shippers is that slowing activity has eased the demand for truckload capacity. "I have observed capacity tightening in the truckload market, but still not to where finding capacity is a problem," she said.

Holding out hope
To be sure, not everyone sees the current numbers as the start of something bad. Ben Cubitt, senior vice president of consulting and engineering at Frisco, Texas-based third-party logistics service provider Transplace, said his customers are providing mixed to favorable responses when asked about economic activity. Some say they're doing very well and staying busy, while others report steady conditions, with a dip in activity followed by a rebound to normalized levels, Cubitt said.

"Most seem to say things are about level—that they are not growing much, but not retreating either," Cubitt said.

In a mid-May survey of 500 shippers, Morgan Stanley & Co. said respondents still reported "robust volume growth," as well as tightening truck capacity and significant year-over-year rate increases. The firm said that orders continued to outpace inventory, suggesting that "inventory restocking could offer another source of upside throughout the year, but is not imminent."

The Institute for Supply Management's widely followed monthly manufacturing report showed a plunge in new orders in May and a five percentage point drop in manufacturer inventories. Inventory being held by customers remained "too low" for the 26th consecutive month, the May report said.

Bradley J. Holcomb, chair of the manufacturing report, said the decline in manufacturer inventories reflects how quickly producers are adjusting their inventories to meet fluctuating demand. "I am seeing that myself at my own company," said Holcomb, whose main job is serving as chief procurement officer at dairy giant Dean Foods.

Holcomb also said customer inventories remain especially lean as retailers shy away from adding to stocks for fear of getting stuck with surplus goods vulnerable to obsolescence. "Retailers have a wait-and-see attitude," he said in an interview. "They are holding back and keeping a tight rein on inventories."

For everyone in the supply chain, the biggest current problem is the persistent rise in raw materials and commodity costs, Holcomb said. One bright spot in May was that the "prices" component of the index declined by nine percentage points from April, indicating a possible moderation in input costs, he said.