U.S. manufacturers and distributors are still struggling to digest excess stocks of raw materials and finished products ordered before an abrupt slowdown in merchandise spending in the second half of 2022.
Total inventories of raw materials, work-in-progress and finished items held by manufacturers, wholesalers and retailers were equivalent to 1.37 months of sales at the end of 2022, up from 1.29 months at the end of 2021.
The unplanned increase in inventories and elevated ratio to sales has reached levels consistent with previous slowdowns in the manufacturing and freight cycle in 2018/19, 2015/16 and 2008/09.
Reducing inventories to more normal levels has become the top priority for firms, mostly through reduced new orders for items to be delivered in the first half of 2023.
U.S. manufacturers reported a fall in new orders every month between September 2022 and February 2023, according to the monthly purchasing managers’ survey conducted by the Institute for Supply Management.
The ISM manufacturing orders index tumbled to a low of just 42.5 (6th percentile for all months since 1980) in January before recovering slightly to 47.0 (11th percentile) in February.
Chartbook: U.S. inventories and freight
Reduced ordering has sharply cut the volume of freight handled through U.S. container ports and carried on railroads and by trucking firms.
The combined number of loaded containers handled by the nine largest ports slumped to 2.51 million twenty-foot equivalent units (TEUs) in January 2023, down from 2.79 million in January 2022, and the lowest for the time of year since 2018.
The number of loaded containers hauled by the major Class 1 railroads slipped to 1.05 million in January 2023, down from 1.10 million in January 2022, and the lowest for the time of year since 2012.
Total tonnage carried by trucking firms was still up by 1.5% in January 2023 compared with the same month in 2022, but growth had slowed from 6.5% in August 2022.
According to the U.S. Bureau of Transportation Statistics, the overall volume of freight moved by road, rail, barge, air and pipeline was down by 0.7% in January 2023 compared with the same month a year earlier.
The freight slump is consistent with previous slowdowns in the manufacturing and freight cycle and implies the manufacturing sector is already in recession (“Freight transportation services index”, BTS, March 8, 2023).
Manufacturers’ difficulties stand in contrast to the resilience displayed by the much larger services sector, where spending, prices, margins and employment are still increasingly rapidly.
But with existing instruments, focused on adjustments to inter-bank rates and government bond buying, monetary policy cannot target the manufacturing and services sectors of the economy separately.
As the U.S. central bank continues to increase policy-controlled interest rates to counter inflation generated in the service sector, manufacturers will be collateral damage and are likely to remain under pressure for at least the next several months.
