A good friend called me from China this evening. We talked about our families and then he asked the question on everyone’s mind, When will the US economy start to turn around? Of course we all have an opinion, including yours truly. The Wall Street Journal did a great job of postulating when that would happen in an article from last week entitled: Glut of Goods is Easing.
It doesn’t take a rocket scientist to catch the drift of the article ” that production begins when inventories shrink. The article presented several nuggets of positive inventory news, some of it metals related. One nugget involves Alcoa. The firm’s inventories are 15% below their levels at the end of 2008. The other relates to Goodyear who predicts a 14% drop in inventory, made possible by significant improvements in our supply chain, as quoted by Robert Keegan, Goodyear’s CEO. According to the Journal article, inventories are important for estimating economic growth because they speak to future levels of output. Gross domestic product is the tally of goods and services produced in the economy, both those sold and those left unsold and held as inventory. Counter-intuitively, an increase in inventories grows GDP while a reduction in inventories causes GDP to decline. Production, not the sales of goods drive the numbers. We have talked a lot about this notion of stocking and de-stocking as it relates to steel, cobalt, stainless steel, and aluminum, among others.
Of course once the de-stocking finally does occur, we’ll have to keep a close eye on demand, lest the re-stocking turns out to be a false alarm.