Posts Tagged ‘unsold inventory’

Expect the recession to get much worse

Saturday, February 28th, 2009

Check out the unsold inventory numbers – Reductions in demand were so steep in December that producers were not able to stop in time. That Inventory will be standing there for quite some time, When the quarter gets re stated in 180 days (like they always do) the decline will have been sharper.

Better (as in more current) indicators of actual economic activity would be found looking at Commercial Rail traffic trends or miles driven. Total traffic is down over 16% y-o-y. That suggests that second quarter GDP will be much worse than 4Q08.

The impact of global declines has not yet fully hit our economy. Only one of several reasons why the “this is good, we will now rebound faster” idea is not sound this time around. Many were surprised when at the end of last year, economic data was not as bad as they projected. Part of the reasons was that the excess inventory problem had not fully hit the market. Expect it to hit soon, and hit hard.

It’s a pretty vicious spiral. Consumers don’t buy goods from stores. Stores have inventory sitting on shelves and warehouses, so they don’t buy from manufacturers. Manufacturers don’t get the capital to produce goods (since no one is purchasing). To make end meets, they lay off workers. These workers (consumers) are unable to purchase goods from stores. Hence the spiral.

Add another dimension – the warehouse concept for retail is built on turns per square foot. If people aren’t buying, each marginal purchase picks up cost per square foot. Lower margins can only last for awhile, especially when leverage has been used to fund the stores. Then, take it a step further in regards to the cost function of the supply chains that are no longer at optimal levels. When you have a system that depends on stability, there is no way to forecast the impact of our present instability.

Sophisticated and large supply chains are narrowly optimized (ODE/PDE) and all the hubs, spokes, trucks, rail cars, depots, warehouses and racks and the people within are built to a forecast demand point which squeezews all excess out of the system within a narrow range of the demand forecast….but change the demand forecast downward in a somewhat significant way and the fixed and semi fixed costs escalate all out of proportion to straight line revenue declines.