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America's factories actually have something in their favour now


THE inventory cloud that's been looming over US manufacturing is starting to dissipate.

Lacklustre export markets, trade-policy uncertainty and corporate investment cutbacks remain headwinds for America's factories following a 2019 downturn. But recent economic data show a welcome turn in stockpiles that could help undergird manufacturing after mounting and weighing on industry over the past two years.

As 2019 drew to a close, companies made progress cutting into the inventory overhang, bringing stockpiles more in line with sales, a number of corporate officials have indicated on recent earnings calls. That follows a period during which firms simply met demand with on-hand merchandise and supplies, as companies reduced orders and factory production dropped in all but one quarter last year.

Government data showed inventories in the fourth quarter increased an annualised US$15.2 billion, the smallest advance since a decline in mid-2018. From makers of steel and engines to glass and paper products, companies are signalling that the inventory correction appears to have largely run its course and is boosting outlooks.

David Burritt, chief executive officer at US Steel Corp, said on a Jan 31 call that inventories are low in the automotive market and at automobile service centres, with orders and customer interactions suggesting "demand should be solid".

"On balance, leaner inventories create a base for a healthier composition of growth in 2020, but we expect a durable rebound in production will be delayed until deeper in the first half," said Andrew Husby, a Bloomberg economist. "Coronavirus disruptions will impact global demand and supply chains, though the US enters that period well-supported by a strong labour market."

Institute for Supply Management data show a gauge of factory inventories has contracted for eight months in a row, the longest such stretch since a similar manufacturing rough patch in 2015-16.

The purchasing managers group's figures for construction, retail, transportation and other non-manufacturing industries tell a similar story, with a record-low share of respondents indicating inventories are too high.

While International Paper, US Steel and Corning are among those seeing the late stage of the inventory correction, others have more work to do to get unsold goods more in line with sales.

"Given the slowdown in customer demand and the increased availability of product due to lower lead times, we do expect dealers will reduce their inventory levels further," Andrew Bonfield, chief financial officer at Caterpillar Inc, said on a recent call. "This reduction is expected to be led by construction industries, but will also impact resource industries."

On their face, the government's monthly data indicate still-troubling levels of inventories. For instance, the inventory-to-sales ratio of durable goods at manufacturers ended 2019 at 1.74 months, the longest in four years.

However, the inventory build appears to be concentrated within the transportation and machinery sectors due to Boeing Co's embattled 737 Max programme. The company continued to build aircraft in 2019, awaiting government re-certification that would allow airlines to take delivery. Production was suspended in January.

The coronavirus indeed introduces another layer of uncertainty for the global economic outlook. But with leaner inventories, along with the the potential resumption of Boeing 737 Max deliveries later this year and a thawing in US-China trade relations, manufacturers should be in a better position to ramp up production should demand accelerate. BLOOMBERG