As the economy cooled last year, many companies found themselves with excess stock, particularly home builders, car makers and the suppliers that depend on them. The result was a sharp pullback in inventory accumulation that now appears to be over, a development that portends production increases. Business inventories declined in March. Although still 4.8% above year-earlier levels, they were 7.7% above year-earlier levels in August. Inventories in the languishing auto industry are running 2.7% below year-earlier levels, the U.S. Commerce Department says.
As the economy has become more technologically sophisticated the inventory to sales ratio has become less important. In other words, companies don't have to have as much product on hand to be successful. That means low inventory levels are the norm. While the inventory draw-down is good, I don't think it has the same predictive power as before.
However, the recent industrial production figures showed a marked increase from the previous month's levels giving this point more credence.
But so far this year, profit growth hasn't sagged quite as much as some anticipated, leaving many businesses with hoards of cash they can steer to capital purchases if the mood strikes. Noting plans by cable companies and telecommunications firms to increase capital spending, Federal Reserve governor Frederic Mishkin last month predicted a rebound in business investment this year. "Business balance sheets are strong, and although profits have slowed, profit margins remain elevated," Mr. Mishkin said. "The continuation of a moderate economic expansion is likely over time to restore confidence and lead to a firming in business investment."
The problem with this point is business was cash rich through the last two quarters. According to the Flow of Funds report corporations are the only economic sector that has contributed to national savings over the last 5 years. In other words, business already had the money to invest and didn't.
Strong global growth together with the recent weakness of the dollar have created what should be an excellent climate for U.S. exporters. Most economists chalk up the decline in exports in the first quarter to a statistical fluke that will soon be undone.
This is the strongest point in the article. A look at the earnings reports from the latest quarter show that companies with strong international exposure did well. The continued projected weakness of the dollar will most likely continue this scenario for the foreseeable future.
As with all matters economic, we'll have to wait and see how this plays out. However, the author does make some good points that provide excellent food for thought.
4 comments:
That last is an excellent point.
The direct impact on the trade balance of a weakening dollar is delayed, because it takes time for volume of imports to react to increases in relative prices, and during that period, the total import bill on the same volume of imports will rise.
However, if exporters, after more than a decade of weak export demand, must invest in productive capacity in order to take advantage of new opportunities in export markets, that investment driven by the weak dollar would provide an immediate growth driver.
With 2 negative moves of the index of LEI in the first quarter and one very weak positive move, the odds of a recession in the summer would seem to be about 50:50. And if we are going to end up in the non-recessionary half, the weak dollar is our best hope.
Let's get real about how quickly most firms will or can respond to changes in the dollar's value. First, most large corporations are working from play sheets drawn up last year. Most of those plays are already committed to in some respect - land purchased, agreements reached, loans negotiated. They aren't going to change their foreign investment unless the dollar truly tanks. Second, they will need time to consider where to invest in hard items inside the US even if they reach a decision that they should direct more investment toward domestic locations. While they may have some idea of where they might want to invest, they arent' going to have defined, actionable projects ready to go on a moments notice. So, they aren't going to be doing anything until 2008. Sorry, those are the facts of life. Besides, most large, multinational corporations have quaffed deeply from the kewl-aid of globalism which says that they should always consider foreign investments first. That means the dollar will need to crater before their mindset suffers a sea change. It ain't gonna happen in 2008. You can thank Jack Welch and his clonse for that.
viziervic:
Why should US multinationals change their strategy if the dollar tanks? What, half of their record (in $ terms) revenues come from repatriating overseas revenues? They are the "first receivers" of inflated dollars, and get to make purchases at present $ prices before the infusion of cash drives the prices up. In short, they make out like bandits due to ever-cheapening dollars. They have every incentive to let the party continue.
Am I missing something?
Ndd, no I don't think you're misunderstanding the situation. The global corps have made their bet and it's not on the US square. Of course, that implies that they will not be investing inside US as some folks have concluded. All of that cash which Dubya's tax policies have handed to the global corps will stay outside the US as a result. We are never going to see it again, except as the downpayment on the firesale purchase of the US.
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