Bloated Inventories Turning Into Economic Hindrance, Pantheon Says

Remember when buying toilet paper was a problem? Now, warehouses crowded with excess goods will shrink the U.S. gross domestic product in 2023’s first half, according to Pantheon Macroeconomics.

Wholesale inventory edged up by 0.1% in December 2022, adding to a glut that will hinder company performance, the research group warned in a note. While inventory expansion is slowing, it has not reversed yet, which is bad news for the retail trade. The result will be a 2% GDP contraction in the first quarter, Pantheon predicted. The firm did not have a specific forecast for April through June.

Nonetheless, “Wholesalers now have too much inventory; the inevitable correction will be a drag on H1 GDP growth,” wrote Ian Shepherdson, the U.K.-based firm’s founder and chief U.S. economist.

The situation marks the decline of the just-in-time supply operational method that once prevailed. It first broke when the pandemic created a demand surge that overwhelmed the system and led to shortages. In response, retailers massively expanded their orders—and now, with demand slowing, there’s an overabundance.

Wholesale inventories of durable goods expanded 20.8% in December 2022, while sales rose just 6.4% in November, the latest data available, Shepherdson pointed out. The problem is that the longer goods sit in storage, the more they lose in value for businesses. It’s a money drain to store merchandise for long spells. When the stuff eventually is sold, it is usually at a steep discount.

The demand slowdown “is likely to continue over the next few months, at least,” the Pantheon report declared. The study sketched out how the Federal Reserve’s ongoing campaign to raise interest rates is gradually eroding the public’s zest for purchasing products. Thus, it went on, “consumers’ spending continues to shift away from goods—the backlog of vehicle orders excepted—and into services.”

One positive sign Pantheon noted is that auto sales have rebounded. That is likely because long-term financing rates have leveled off (unlike short-term rates, which the Fed is still ratcheting up).

More broadly, the supply dilemma is part of the reason that reported S&P 500 profits for last year’s final quarter are dipping. Earnings per share are estimated to have slid 5.3% in Q4 2022, pending all companies reporting, by the count of FactSet researchers.

It’s hard to say how long warehouses must wait to clean out their excess supplies. For inventory-laden businesses, that day can’t come soon enough.