Comments on: The mother of all inventory corrections is not the same as re-stocking http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: The recession is over but the depression has just begun | The Big Picture http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-7603 The recession is over but the depression has just begun | The Big Picture Fri, 18 Dec 2009 22:29:28 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-7603 [...] not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment [...] [...] not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment [...]

]]> By: The recession is over but the depression has just begun « naked capitalism http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-6626 The recession is over but the depression has just begun « naked capitalism Fri, 02 Oct 2009 03:50:04 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-6626 [...] not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment [...] [...] not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment [...]

]]> By: hbl http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57163 hbl Sat, 19 Sep 2009 04:02:00 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57163 You may be right but I find it peculiar that a statistical artifact would follow such a smooth trend, so I think there is some meaningful explanation for it, whether or not it is relevant to your post. And yes I understand the implication of it being a ratio impacted by both numerator and denominator. The <a href="http://www.census.gov/mtis/www/mtis_current.html" rel="nofollow">underlying report</a> shows sales having fallen 17.8% y/y and inventories only 11.8% y/y -- so sales falling faster than inventories is clearly the key to why the ratio jumped in 2008 (and the ratio has been falling since as inventories are reduced relative to sales). Inventories represent on average only a little more than a month's worth of sales yet inventories have been getting reduced since late 2008, meaning most sales have been flowing through to generate new production each month (i.e. only a minority are filled from inventories that are then not restocked)... I think I need to play with the data a bit more but I do still think your point is still valid. You may be right but I find it peculiar that a statistical artifact would follow such a smooth trend, so I think there is some meaningful explanation for it, whether or not it is relevant to your post. And yes I understand the implication of it being a ratio impacted by both numerator and denominator. The underlying report shows sales having fallen 17.8% y/y and inventories only 11.8% y/y — so sales falling faster than inventories is clearly the key to why the ratio jumped in 2008 (and the ratio has been falling since as inventories are reduced relative to sales).

Inventories represent on average only a little more than a month’s worth of sales yet inventories have been getting reduced since late 2008, meaning most sales have been flowing through to generate new production each month (i.e. only a minority are filled from inventories that are then not restocked)… I think I need to play with the data a bit more but I do still think your point is still valid.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57155 Edward Harrison Fri, 18 Sep 2009 17:22:00 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57155 I think that's another statistical artifact. When you use a ratio, it doesn't measure the absolute amount, so if the numerator and denominator both go down, the ratio can stay the same. We know that output has gone way down. So, if inventories go down in proportion (keeping the ratio constant), on an absolute level they are low. That's the same thing that's happening in the housing market ie there are 10 months unsold inventory but the sales number has plummeted. The question is what is a 'normalized' output number. that's what manufacturers grapple with - should I raise output to meet anticipated normal demand or is this new lower demand level what I should expect going forward? I think that’s another statistical artifact. When you use a ratio, it doesn’t measure the absolute amount, so if the numerator and denominator both go down, the ratio can stay the same.

We know that output has gone way down. So, if inventories go down in proportion (keeping the ratio constant), on an absolute level they are low.

That’s the same thing that’s happening in the housing market ie there are 10 months unsold inventory but the sales number has plummeted.

The question is what is a ‘normalized’ output number. that’s what manufacturers grapple with – should I raise output to meet anticipated normal demand or is this new lower demand level what I should expect going forward?

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57154 Edward Harrison Fri, 18 Sep 2009 17:18:00 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57154 michael, good to hear from you in the comments! What you say about no positive outlook until the end of 2010 rings true. The technical recovery is (probably) here now but we won't get back to where we were when the recession began in Dec 2007 for a long while. So, it's not going to feel good for a while. But, you know, even Ben Bernanke is saying this now. And the contrarian in me gets nervous when everyone is piling into the same trade. michael, good to hear from you in the comments! What you say about no positive outlook until the end of 2010 rings true. The technical recovery is (probably) here now but we won’t get back to where we were when the recession began in Dec 2007 for a long while. So, it’s not going to feel good for a while.

But, you know, even Ben Bernanke is saying this now. And the contrarian in me gets nervous when everyone is piling into the same trade.

]]> By: Michael Jung http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57152 Michael Jung Fri, 18 Sep 2009 16:50:00 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57152 Really good analysis and explanation. Plus it will take a while till consumption ticks up. All that private debt (to pay down), the return of a positive savings rate in America, and the prolonged high unemployment rate while the economy itself restructures/shuffles around resources - takes time. I think we can't see a real positive outlook for 'the people of America' till the end of 2010. Its long from over. Really good analysis and explanation. Plus it will take a while till consumption ticks up. All that private debt (to pay down), the return of a positive savings rate in America, and the prolonged high unemployment rate while the economy itself restructures/shuffles around resources – takes time. I think we can’t see a real positive outlook for ‘the people of America’ till the end of 2010. Its long from over.

]]> By: hbl http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57151 hbl Fri, 18 Sep 2009 16:15:00 +0000 http://www.creditwritedowns.com/2009/09/the-mother-of-all-inventory-corrections-is-not-the-same-as-re-stocking.html#comment-57151 Recent manufacturing reports do seem to confirm what you describe, in that at the very least there must be less inventory drawdown to fulfill sales (even if there is not necessarily inventory building). What still surprises me is that there is a need to move beyond inventory drawdown at all given the <a href="http://research.stlouisfed.org/fred2/series/ISRATIO" rel="nofollow">inventory to sales ratio</a> only being halfway back to trend (though the data is only through July). Now clearly this is just an aggregate measure and the distribution across companies will mean that many have already purged inventory while others have way above the average. If so, this might mean we are only at the leading edge of this effect (which would be very bullish for several quarters, unless sales slump significantly!) Do you have a different explanation for recent activity in the face of a still high ISRATIO? Recent manufacturing reports do seem to confirm what you describe, in that at the very least there must be less inventory drawdown to fulfill sales (even if there is not necessarily inventory building). What still surprises me is that there is a need to move beyond inventory drawdown at all given the inventory to sales ratio only being halfway back to trend (though the data is only through July). Now clearly this is just an aggregate measure and the distribution across companies will mean that many have already purged inventory while others have way above the average. If so, this might mean we are only at the leading edge of this effect (which would be very bullish for several quarters, unless sales slump significantly!) Do you have a different explanation for recent activity in the face of a still high ISRATIO?

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