(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2Fqzlbh
By John Kemp
LONDON, June 25 (Reuters) - Rising stocks of unsold products have hampered U.S. manufacturing activity over the last year and point to an economy struggling to maintain momentum amid a trade war stalemate and increasing uncertainty.
U.S. manufacturers, wholesalers and retailers held stocks of raw materials, work-in-progress and unsold items equivalent to 1.39 months’ worth of sales at the end of April, up from 1.34 months at the end of June 2018.
The rising inventory ratio has reversed the downtrend that prevailed over the previous two years and suggests manufacturers and distributors were taken unawares by a slowdown in sales since the middle of 2018.
Elevated inventories are likely to depress new orders and manufacturing production runs over the next few months as producers and distributors try to control and then reverse the unplanned build up.
Merchant wholesalers have been the worst hit, with inventory ratios rising from a low of 1.26 months in June 2018 to 1.34 in April, according to figures from the U.S. Census Bureau (tmsnrt.rs/2Fqzlbh).
Wholesalers have reported the fastest increase in inventory ratios since the 2014/15 mid-cycle slowdown and before that the recession of 2008/09, in a sign of how rapidly and unexpectedly the economy has cooled.
The rise in wholesale inventories has been entirely concentrated in durable items intended to last three years or more where the ratio has risen to 1.75 from 1.59 in May 2018.
Within the durables sector, unsold motor vehicles and parts have surged to 1.80 months’ worth of sales from just 1.55 in June 2018 and are now at the highest level since the middle of the last recession.
By the end of April, wholesalers had $71 billion worth of unsold new autos and parts on hand, compared with $63 billion at the same point last year.
The glut of unsold cars and light trucks is consistent with other indicators that show motor manufacturing has been the weakest element of the economy over the last 12 months.
Automakers reported production down 1 percent in the three months from March to May compared with the same period a year earlier, according to the U.S. Federal Reserve.
Motor manufacturing accounted for a large part of the slowdown in the economy during the first quarter; at one point output was falling at the fastest rate since the recession, though it has since stabilised.
Automakers increased employment by just 0.5% in the three months from March to May compared with the same period a year earlier, down from 4% growth this time last year, and the worst performance for nine years.
Vehicle makers and distributors have been trying to raise prices since the middle of last year, reversing some of the previous softening in 2017 and earlier in 2018, which could account for the sales slowdown.
Even so, new vehicle prices are still slightly below where they were two years ago, a sign of how much the sector is struggling.
Consumer attitudes towards major durables purchases, which includes motor vehicles, have become significantly cautious since last year, which also helps explain the slowdown.
The proportion of consumers who think now is a good time to make a major purchase has fallen to the lowest level for three years (“Preliminary results for the May consumer survey”, University of Michigan, May 17).
The struggles of motor manufacturers are symptomatic of a wider economy in which consumers and businesses are unwilling to make expensive commitments given the atmosphere of uncertainty.
- Global economy on the leading edge of recession (Reuters, June 12)
- U.S. consumer confidence critical to the economic outlook (Reuters, May 31)
- Markets expect rate cuts as economic outlook worsens (Reuters, May 17)
- Fed rate cut likely if U.S. manufacturing continues to slow (Reuters, May 2) (Editing by David Evans)