Global News Data shows US in midst of extended period of inventory drawdowns

While retailers such as Walmart, Target and TJX Companies have made progress in right-sizing their inventories so that they are turning their inventories at nearly the same pace they were in 2019, broader industry-level data from the US Census Bureau, US Bureau of Labor Statistics and US Bureau of Economic Analysis suggests we are in an extended period of inventory drawdowns for many import-centric sectors of retail trade and wholesale trade.

This is especially true of wholesale and retail sectors that rely heavily on air freight to move high-dollar-value, time-sensitive products from Asia to the US. This suggests not only a muted peak import season in the second half of 2023, it also further suggests soft volumes will continue into the middle of 2024.

While some analysts have argued that there is little evidence of retailers and wholesalers drawing down inventories when looking at aggregate retail trade or wholesale trade data, focusing on the more detailed subsector-level data indicates substantial drawdowns of inventories in several import-centric sectors of wholesale trade and retail trade. Focusing on nominal inventories that have not been corrected for inflation (which makes estimates of declines in physical stocks conservative given continued inflation in these subsectors), the following import-centric industries have shown substantial declines in seasonally adjusted inventories as of June 2023 from their 2022 peak:

• Furniture and home furnishings wholesaling, down 9.7% from the September 2022 high.
• Professional and commercial equipment wholesaling, down 6.3% from the September 2022 high.
• Apparel wholesaling, down 11.7% from the November 2022 high.
• Furniture, home furnishings, electronics and appliances retailing, down 11.7% from the June 2022 high.
• Building material retailers, down 5.5% from the August 2022 high.
• General Merchandise Retailers, down 4.2% from the August 2022 high.

Not only are these industries drawing down stocks, but each has shown declines in physical unit sales from their 2021 or early 2022 highs based on the Bureau of Economic Analysis data on inflation-adjusted sales. Sales coming down from their post-COVID highs in conjunction with inventory drawdowns combine to make replenishment orders — which drive imports — even softer than would be expected by declining inflation-adjusted sales. Inventory right-sizing, drawdowns have a way to go Even in import-centric sectors that have reduced inventories, there is still substantial room for further inventory drawdowns to return inventories-to-sales ratios — a key performance metric for inventory managers — to pre-COVID levels observed in 2019. For example, even though apparel wholesalers have already reduced inventories by 11.7% from the 2022 highs, if their current level of sales continue to hold, then apparel wholesalers will need to further trim inventories by another 32% for their inventories-to-sales to return to 2019 levels.

Additionally, some sectors such as wholesalers of household appliances, electrical goods and electronic products have only recently seen inventories begin to decline, and they will need to cut inventories by 17%, assuming their sales stay at current levels, to achieve the same ratio of inventories-to-sales that they experienced in 2019. Toy importers as a case study No company’s financial data better illustrates the whiplash in importing activity than Hasbro. As widely documented, demand for toys surged with the onset of the COVID-19 pandemic as parents sought to entertain children stuck at home. Hasbro’s sales, not surprisingly, showed strong growth in 2020 and 2021. Likely due to a myriad of factors, Hasbro’s inventory managers appear to have ordered far too many products in 2021, which caused a surge in inflation-adjusted arrivals (calculated as cost of goods sold for the current quarter plus change in inventories for the current quarter relative to the prior quarter) in fourth-quarter 2021 to second-quarter 2022.

The large increase in arrivals was not met with a concomitant increase in sales, which resulted in the rapid accumulation of inventories into 2022, which are only now starting to decrease. As of its most recent fiscal quarter ended July 2, 2023, Hasbro was taking 64% more days to turn its inventory than second-quarter 2019. This suggests an extended period of inventory drawdowns will be needed to get this ratio back toward the stable levels it was at in 2018 and 2019.

Implications for transportation providers Since inventory drawdowns are likely to continue for many more months, a rapid rebound in container freight or air freight is unlikely until at least the middle of 2024, even if demand was to show an unexpected rebound before then. Comparing air freight versus containerized freight from Asia, I expect more softness in air freight volumes given sectors such as apparel wholesale have recently seen especially sharp declines in sales, while sectors such as wholesalers of household appliances, electrical goods and electronic products have not yet made meaningful progress in bringing their inventories-to-sales back toward 2019 levels.

Consistent with this, the Bureau of Labor Statistics’ inbound air freight price index from Asia to the US has reverted to its February 2020 levels, after having doubled from these levels in late 2021 into early 2022. In contrast, my sense is that containerized volumes will continue to track their pre-COVID trendline, which suggests ocean carriers will face challenges into 2024 with managing supply given the amount of newbuild capacity set to come online.