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Recovery Indicators Rebound from Prior Report; GDP Grows, but Inventory Drives It

The recovery indicators generally improved last month,

By Dr. Joe Webb
Published: November 8, 2013

The recovery indicators generally improved last month, except for new orders for the non-manufacturing sector. Even though they dropped by -4.7%, the absolute level of the index indicates that growth rates are still positive, just slightly less so. The NASDAQ increased again, but it's hard to tell with how volatile it has been in recent weeks. Here's the chart, click to enlarge.

recovery tracker 110713

The GDP report was okay at best, coming in at +2.8% for the third quarter. The year-to-year GDP rate is only +1.7%, half of the post-WW2 average. Much of the increase in GDP was inventory buildup. Most news reports attribute it to companies missing demand targets and ending up with too much inventory left. I'm suspicious. I believe that there is a good chance that businesse are building up inventory so they can aggressively cut back on staffing after January 1, when worker benefits costs rise with the implementation of the ACA. That is, unless that business got a waiver, of course. If they did, they may still cut back in the near future to adjust to slower demand that the GDP report implies. This seems contradictory in light of the good ISM survey figures for both manufacturing and non-manufacturing. These reports were strong on their top lines, but the new orders stayed in line with prior months. Here's a question: why would new orders go up at the beginning of Q4 according to the ISM report if there was inventory piling up on the shelves for the Q3 report of GDP? One thing that does explain it is that businesses are stocking up on inventory that has a lower labor cost component now than it does later. The usual barrier to that kind of stockpiling is finance costs that get tied up in non-moving inventory (that's a reminder that there are three types of inventory accounting, FIFO, LIFO, and FISH, “first in, still here”). Finance costs, however, are below inflation for the most credit-worthy companies. We know they have easy access to money because they are borrowing money to buy back stocks, rather than borrowing money to invest in plant and equipment, so stocking up on inventory has little penalty compared to usual circumstances. Time will tell, of course. # # #

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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