Is the Inventory Cycle Dead?

(Export Development Canada – Peter G. Hall)

One clear indication of impending recession is the number of economy-watchers saying “It’s different this time”. Fooled again – so far, the global economy’s woes look pretty similar to past recessions, only moreso. But the phrase hasn’t been dropped completely. With all the recent innovations in inventory management, many are wondering if the inventory cycle is dead.

Does it really matter? Absolutely – inventories usually pile up as the economy softens, and the recovery is delayed until they are worked off. These pile-ups have been substantial in the past, but there is good cause to believe that times have changed. Vast changes in computing and communication technology have revolutionized inventory management over the past economic cycle. Just-in-time product flows enabled by electronic data interchange systems have redefined flows of goods and given new importance to logistics. And the low, stable price environment, also a key feature of the past economic cycle, has reduced the economic incentive to hold inventories.

Tighter inventory management is unmistakable in current economic data. In Canada, across the economy businesses held an average of 66 days of inventories in the mid-1990s. The number has dropped steadily since, to just under 55 days last summer. Canada is not alone. The stock-to-sales ratio in the US has fallen consistently, and is now 27% below the early-1980s level. Most other developed countries have experienced the same general pattern.

The trend is great, but is tighter control helping to manage end-cycle inventory fluctuations? It may be too early to tell; the recession has just begun, and data are still coming in. But early signs are worrisome. US inventories as a share of sales spiked in the fourth quarter by more than the entire increase in the 1990-91 recession. And in just six months, the ratio has climbed by two-thirds of the increase that occurred over 18 months in the 1981-82 recession. Read more here.