August 5, 2016
Perhaps the most distressing issue facing the U.S. corrugated industry is an unanticipated manufacturing recession. Because of a combination of decreasing consumer demand and overproduction of goods, box plant customers suddenly have excess inventory. Consequently, box production faces an even more rapid slowdown as the impact is amplified back into and through the box plants’ supply chain, leading to industrywide economic distress.
Anticipating manufacturing recessions allows independent corrugators to better match supply to customer demand. Careful and continual analysis of inventory levels relative to demand is critical for independent corrugated converters.
Anecdotal customer information aside, the earliest signs of inventory growth come from the Institute for Supply Management’s monthly “Report on Business” (see www.ism.ws). However, more complete data are reported monthly by the U.S. Census Bureau’s “Survey of Manufacturers’ Shipments, Inventories, and Orders” approximately 45 days following the end of the month being reported. Included among the data reported are inventory-to-shipment ratios measured in months of supply for the U.S. manufacturing industry and key manufacturing industry segments.
This article examines the short- and long-term trends of the inventory-to-sales ratios of the total manufacturing sector and the nondurable goods sector of the U.S. manufacturing base, which consumes more than 75 percent of U.S. corrugated packaging. Inventory-to-sales ratios differ in these sectors, but all provide insight into the current state of inventory management.
In the charts provided, the significant manufacturing recession that occurred in conjunction with the economic recession of 2008–09 is shaded. Inventory-to-sales ratios have been shown as three-month moving averages to dampen the impact of month-to-month swings.
The Total U.S. Manufacturing Inventory-to-Sales Ratio (Chart 1) showed a sharp 20 percent rise during the severe recession that began in the second quarter of 2008 and ended in the summer of 2009. Following the recession, however, the ratio did not return to its historical range of around 1.2 months, as retailers of durable goods successfully pushed some stocks back into manufacturers’ warehouses. For almost five years following the recession, the inventory-to-sales ratio remained in a narrow range around 1.3 months of supply as inventories were well-managed. However, toward the end of 2014, as the U.S. dollar strengthened dramatically against most foreign currencies, manufacturing activity faced strong international trade headwinds and slowed to a crawl. Consequently, inventories began to rise relative to sales, even as manufacturers reduced actual stocks.
Throughout 2015 and into this year, the inventory-to-sales ratio continued to rise into cautionary territory, reaching 1.37 months in March 2016. That put it 5.4 percent above its long-term average of 1.3 months and only 5.5 percent below its peak during the last recession. Efforts to reduce this high ratio will have a dampening effect on manufacturing activity in the months ahead.
Since nondurable goods consume some 75 percent of U.S.-produced corrugated packaging, understanding inventories in this sector is especially important. The inventory-to-sales ratio for nondurable goods—those intended for consumption within three years (Chart 2)—has averaged about 1.0 months of supply over the nine years shown on the graph—significantly less than overall manufacturing. It also exhibited a sharp rise during the recession and took about one year to recover to normal levels following its peak at the end of 2008—depressing box demand during that period. For 4½ years following the recession, it remained at or below its long-term average level. However, since then the nondurable goods sector has risen into cautionary territory in a manner similar to overall manufacturing. In March, the nondurable goods inventory-to-sales ratio was poised midway between its long-term average and its prior recessionary peak, suggesting that nondurable goods manufacturers’ warehouses hold more than enough finished goods.
Keeping an eye on customer inventories is critical when planning for future production. As the examples discussed here illustrate, individual market sectors have inventory-to-sales ratios that behave quite differently and must be examined individually in conjunction with other business intelligence to determine prospects for future business opportunities.
Dick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.
