Friday, August 31, 2012

Manufacturers' Inventories


Click to enlarge.

As seen in the red trend line, the data was extremely predictable from 1992 to 2001. That was true right up until it wasn't. That brings us to the chaos trend line in blue. Note the drop in correlation from 0.91 to just 0.19. Much of it is due to the data being so noisy. I trust this new upward trend about as much as I would trust random dartboards.

I don't think most companies have a clue as to how much short-term inventory they should keep on hand now, any more than I would. There are too many distortions in this economy to know what the future will bring. If they are making a mistake here, wouldn't it be nice to know in which direction?

That brings me to the next chart. It shows the deviation from the trend lines in the first chart.


Click to enlarge.

The dotcom bubble created quite the surprise. We moved quickly from the red data to the blue data. It was a paradigm shift. Previous assumptions proved invalid. There was way too much inventory for what was coming.

The housing bubble also apparently created quite a surprise. The chart implies that it shouldn't have, but that's another story. Once again, there was way too much inventory for what was coming.

Based on where we are now, I'd say that the danger level has been reset. Is there too much inventory for what is coming? I tend to think so.

Manufacturing Inventory

Adjusting manufacturing inventory to current production needs is a critical management responsibility.

This is no doubt why CEOs are paid the big bucks. Let's hope they don't @#$% it up again.

Source Data:
St. Louis Fed: Custom Chart

2 comments:

Craig M. Brandenburg said...

The dotcom bubble created quite the surprise. We moved quickly from the red data to the blue data. It was a paradigm shift. Previous assumptions proved invalid. There was way too much inventory for what was coming.

You know, economists got one thing right back in the late 90s: it really is a “new economy”. Too bad it's not an economy many people want.

Stagflationary Mark said...

Craig M. Brandenburg,

It was just a horrible run of bad luck. I'm sure everything has been fixed and a new era of perpetual prosperity will soon unfold. We just need to borrow more money.

There now ensued a series of incidents which transported me to the opposite extremes of ecstasy and horror; incidents which I tremble to recall and dare not seek to interpret. - H.P. Lovecraft