Low Inventories Need Replenishing

Inventory levels have plummeted in the U.S., and this bodes well for the manufacturing economies of countries that export to it.

Some sectors, such as retail, have allowed their inventories to fall. These businesses include clothes shopping outlets and restaurants . The cause of these decisions is obvious given the lockdown brought about by COVID- 19. With retail outlets closed, companies clearly were not going to restock shelves only to have the merchandise collecting dust. However, now that the economy is re-opening, these companies are in desperate need of new inventory and the suppliers have been challenged to deliver. Manufacturing has struggled to keep up with surging demand due to a combination of new lockdowns and restrictions, access to inputs and transportation bottlenecks. So, the likelihood is that these inventories will remain under strain for some time. The longer than expected timeframe to meet demand, will keep the manufacturing industry that creates these products busy for the foreseeable future.

The highest profile example of the manufacturing shortfall is in computer chips. The massive shortage of computer chips is slowing the delivery of motor cars, iPhones and any other product that requires chips to create or operate them. Chips, like the factories they are built in, take a long time to manufacture and those facilities are very expensive to build. So, we can expect prices to go higher in the near term, but we can also expect to see chip manufacturers returning to the U.S., bringing high paying jobs to qualified staff.

This is the good news but the bad news side to the story is that shortages drive prices higher and thus, one must be on the lookout for inflation. Exacerbating the inflation story are the shipping difficulties caused by a combination of weather, lockdowns, and the subsequent backlogs at major ports. In July, California ports had a backlog of 33 ships. In normal periods, the ports would generally not have more than one ship waiting. Earlier this month, due to the discovery of one COVID-19 case, China shutdown a portion of the world’s third busiest port, which was already facing a backlog before this further disruption. These supply chain disruptions are creating challenges for manufacturers trying to deliver much needed goods to economies short on inventories.

Overall, the ongoing inventory shortages may play havoc with some supply chains, but they are also a positive indicator from an economic growth standpoint. As the supply disruptions eventually get resolved, the need to rebuild inventory will support the economy for a considerable period.

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