Thursday, August 06, 2009
the potential for inventory cycle
Paul Krugman has been predicting a double-dip recession based on an inventory bounce. He figures that middle to latter part of this year will have an inventory bounce which will (briefly) make the economy look good again – but will not (in his Keynsian world view) bring back the fragile flower of true sustainable demand and hence will not result in sustained recovery.
That said – the inventory bounce might be very spectacular indeed. I wish to illustrate with an (admittedly) extreme example – the manufacturing of recreational motor boats (scornfully known in the Australian vernacular as “stink boats”). ...
So what do we have
• End sales down 30 percent
• Dealer sales down 60 percent
• Production down 75 percent
Or – as they put itWe produced 13% of what the dealers actually retailed, in terms of even numbers.
Obviously these numbers are unsustainable and either retail sales have to dramatically fall from current levels (unlikely) or production has to grow dramatically...
How else do you spell inventory bounce?
My guess is that the inventory bounce here will be so big as to restore pricing power to (of all things) luxury recreational motor boats manufacturers.
This looks like a V-shaped recovery – at least for stink boat manufacturers.
Whilst there are inventory shortages in far more important industries (see this story from the WSJ about auto-dealer inventory shortages) they won’t quite be of the scale of Brunswick. But the risks to the inventory driven manufacturing economy are in my view (and quite surprisingly) to the upside.
in the competition between secular private sector deleveraging and inventory dynamics, inventory dynamics can win for a time. the inventory cycle might drive something that looks (for a time) very like a real recovery -- even without any end demand pickup whatsoever.