Inventory Numbers Take a Turn for the Worse

Tech companies were supposed to be clearing out their wares, but recent data suggest otherwise.
By Justin Lahart ,

Newly revised data suggest that tech companies' inventory problems may take longer to work out than previously thought.

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A few weeks ago the

Commerce Department

restated its monthly figures on manufacturers' shipments and inventories going back to 1992. It benchmarked the figures to the 1997 economic census and recent annual manufacturing surveys, updated its seasonal adjustments and made some other tweaks.

The result painted a less rosy picture of the U.S. economic landscape than the one we had come to see. It showed manufacturers' inventory-to-shipment ratios, a good read on inventory health, were higher in March than the previous data had suggested. Then, last week the Commerce Department released the inventory and shipments data for April. They showed the inventory-to-shipments ratio at its highest level in 33 weeks. This is bad news: Inventory rising relative to shipments is a sign that production is outstripping demand.

The Inventory Correction That Wasn't?
Inventory-to-shipments ratio, old and new

Source: Commerce Department

"Inventory levels are flat-out too high in a number of areas," says Richard Berner, chief U.S. economist at

Morgan Stanley Dean Witter

-- particularly computers and electronic parts. Berner believes that in order to work through the inventory overhang, companies will need to further trim production and payrolls. Those cuts will work as a drag on the economy, pushing recovery out to the fourth quarter -- later than most economists expect and later than most investors are prepared for.

In the near term, the bad news on inventories may mean that the upcoming earnings season won't be such a merry time. It's not just that results are going to be poor -- investors should by now be prepared for that -- but that companies' outlooks may not be improving markedly. What the market wants to hear from companies is how production cuts paid off, that inventory levels are trim and that sales are beginning to come back. Instead, many companies may be saying that inventories are still excessive, and if that's the case, any chatter about how sales are improving will likely be taken as hearsay.

The Trouble in Tech
Inventory-to-shipments ratio for computers and electronic products

Source: Commerce Department

Not all industries are likely to be affected, however. If anything, the nation's inventory problems seem concentrated in technology.

"The companies that the market cared the most about are the ones that are having the most trouble," says

Salomon Smith Barney

senior economist Steven Wieting. "The rest of the economy -- it's pretty remarkable what it managed to do."

While the overall inventory-to-shipments situation is less than good, when you separate out the data for computer and electronic products manufacturers it begins to look downright atrocious. From September to April, inventory for these two groups rose from 1.21 to 1.51 -- an increase of 25%. Says Berner, "You don't really have the sense that these companies have wrestled this thing down to the ground."

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