Steve Blitz Morning Notes

Growth forecasts for the second half of the year are built, in part, on manufacturers restocking inventories. The forecasts will need a better base than that. Judging from the ratio of inventories to shipments and the year-over-year growth for new orders and inventories, manufacturers of nondefense capital goods excluding aircraft are not likely to be growing inventories anytime soon (see chart below).

Coming out of the previous recession, inventory growth didn't turn positive until very late in 2004 and the ratio of inventories to shipments was well below the low of the previous cycle. Of course the economy was well into recovery by then, led by consumers and their new found mania for home buying -- an unlikely occurrence for this cycle.

Lest one think I am painting too broad of an industrial stroke, after all different industries lead and lag in each cycle, the same chart is produced for manufacturers of information technology -- the expected lead industry for a post-industrial world. Unfortunately, the chart paints a similar picture. Less negative growth in inventories is likely, positive growth isn't.

In sum, forecasting a positive second half on the basis of manufacturing to rebuild inventories seems more like wishful thinking than not.