Elevated inventories for US industry unlikely to worsen the downturn

Major shocks over the past two years have prompted US manufacturing firms to rethink their supply chains, with greater inventory stocking being one of the reactions. Across several major manufacturing sectors, inventories relative to shipments have since settled above historic norms.

What you will learn:

• High levels of inventories mean there is ample scope for a drawdown as the recession that we foresee for the US economy unfolds during 2023. In the past, changes in inventories frequently amplified the economic cycle, although the relationship appears to have weakened over time.
• In recent months, manufacturing inventories have still been growing across most sectors, but the rate of growth has started to decline. We believe a further drawdown is likely as the economy is heading into recession driven by the Fed’s ongoing tightening that will weigh on corporate profits, hiring, and business investment.
• However, we see it as plausible that firms maintain higher safety buffers than they did in the past, limiting the drop and economic impact in our baseline forecast. We expect that inventories will be within the historical norm of the past decades and so will play a relatively minor role in the expected downturn.