The rising stockpiles of cars, furniture and other goods that helped the U.S. economy boom in 2018 are now poised to cause a hangover this year.
Inventory accumulation added an average 1.2 percentage point to U.S. growth in the third and fourth quarters, government figures show, and were a key to the year’s 3 percent expansion, the fastest since 2005 and President Donald Trump’s annual goal. Reversing that buildup will trim growth in 2019, likely starting in the second quarter and continuing through the rest of the year, according to a Bloomberg News survey of 20 economists last week.
One overhang is the auto market, where the six-month average of dealer stocks of cars and trucks matches the highest since 2009 at 75 days. Manufacturers and sellers of furniture and clothing share the same problem, as do small businesses. The inventory swing is likely to exacerbate the U.S. slowdown, with the economy already facing headwinds from the waning impact of tax cuts, slowing global growth and continuing trade tensions.
“This puts the U.S. economy on a little bit thinner ice and less able to withstand any unexpected shock,” said Diane Swonk, chief economist at accounting firm Grant Thornton LLP in Chicago. “This is one more reason it makes sense for the Federal Reserve to hedge its risks by staying on the sidelines.”
In March, more small-business owners planned to reduce rather than increase inventories in for the first time since December 2017, according to the National Federation of Independent Business’s monthly survey released last week. Yet firms said they were continuing to build up stockpiles for the ninth straight month.
There are two major causes of the inventory overhang. First, manufacturers and retailers bought imported goods in bulk last year in anticipation of tariffs or other barriers, especially from China, with whom Trump’s trade advisers are trying to negotiate a deal. Second, sales have been disappointing for retailers, with declines reported in two of the past three months.
“Firms spent the back half of 2018 trying to get ahead of trade disputes,” said Richard Moody, chief economist at Regions Financial Corp. That led U.S. firms “to step up imports of goods, whether consumer goods or capital goods, and store them in inventory.’’
Exactly how this plays out is uncertain. While trackers such as the Atlanta Fed’s GDPNow estimate that inventories made a positive contribution to first-quarter growth, some economists say the drawdown may have begun then.
What Bloomberg’s Economists Say
A mini-inventory cycle is clouding a proper accounting of the underlying health of the economy -- and creating a false sense of weakness at present. To be sure, an inventory correction in the near term will clobber GDP growth -- in addition to weighing on factory sector output and hiring. However, as a result, forecasters may be under-estimating the likely growth trajectory of the economy in the second half of the year -- thereby setting up for a significant reconfiguration of expectations once the overhang has been ameliorated. -- Carl Riccadonna, chief U.S. economist Click here for Bloomberg Economics’s full report on the inventory impact.