US inventory drawdown key to trans-Pacific volume recovery: analyst
The recovery of Trans-Pacific container volumes from Asia to North America will depend, in part, on how quickly importers are able to draw down excess inventories over the coming months.
While there are encouraging signs regarding general merchandise retailers seeing their inventories-to-sales return toward pre-COVID levels after spiking on a seasonally adjusted basis in mid-2022, data from the wholesale trade sector for import-centric wholesaling industries suggests many of these sectors have a long way to go before their inventories-to-sales come back to pre-COVID levels.
Four sectors to watch
Four wholesaling sectors worth monitoring concern wholesaling of furniture and furnishings; household appliances and electrical and electronic goods; hardware and plumbing and heating equipment and supplies; and apparel. All of these wholesale sectors purchase product categories where imports are prevalent, and they are quite large in size.
For example, sales at furniture wholesalers are on par with those of furniture retailers. In a sign of bad news for container carriers, inventories-to-sales ratios for all four sectors are quite elevated from 2019 levels. For example, inventories to sales for apparel wholesalers were about 2 before COVID-19, but this ratio is currently 3, a 50 percent increase. Inventories-to-sales for furniture wholesalers were about 1.7 before COVID-19, but are currently at 2, an approximately 20 percent increase. Inventories-to-sales for household appliance and electrical product wholesalers were about 1.10 before the pandemic, but are about 1.25 today, up 14 percent. Lastly, inventories to sales for hardware and HVAC wholesalers have increased from approximately 2 before COVID-19 to 2.7, a 35 percent increase.
While some of these increases in inventories to sales may be justified given the need to carry more safety inventories to hedge against elevated levels of uncertainty in both demand and lead time, it seems highly likely than many wholesalers in these sectors over-ordered. Consequently, we should expect orders to be curtailed by the desire to right-size inventories.
Some good news
Despite the fact these wholesale sectors currently have elevated inventories-to-sales ratios, the good news is that US Census Bureau data on inflation adjusted wholesale trade sales indicates sales remain robust in each of these sectors. For example, inflation adjusted sales for hardware and HVAC wholesalers are ~5 percent above their 2019 levels, whereas furniture wholesalers are still selling 20 percent more products today than in 2019.
Household appliance and electrical products wholesalers currently have sales 25 percent above their 2019 levels. Apparel wholesalers appear in a weaker position, with demand even with 2019 levels. The fact inflation adjusted sales do not appear poised for sharp declines suggests that these wholesalers, with a few months of constrained ordering, should be able to right the proverbial inventory ship as we move into the second half of 2023.
Excluding apparel, the critical sector to watch in the coming months is single-family starts, as new home construction generates demand for a wide variety of imported products (e.g., small appliances, large appliances, furniture, furnishings, etc.). Further declines in housing activity will prolong the drawdown of excess inventories and, in turn, the recovery of trans-Pacific container volumes.
Source: Journal of Commerce
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