Dismay is exaggerated over imbalanced stocks

Dismay is exaggerated over imbalanced stocks

Dismay is exaggerated over imbalanced stocks

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Corporate inventories used to be the domain of accountants and logistics cliques, but since the pandemic, they seem to be everyone’s business. The combination of sluggish supply lines and strong demand has fueled concerns that companies are struggling to stockpile, fueling the highest US inflation rate in four decades.

Against that backdrop, big-box retailer Target Corp. inside, who said two weeks ago that it has too much inventory and needs to cut inventories. It turns out that Target isn’t alone, and now some are concerned that companies are overstocked. “This stock issue highlights the cyclical reason we say we think inflation will unravel,” fund manager Cathie Wood told Bloomberg Television. “We think the biggest risk by far is deflation.”

So do US companies have an inventory problem? And if so, what is that: too little stock or too much?

It is true that companies have recently built up stock. Corporate inventories rose nearly 16% in April compared to a year earlier, according to the latest Census Bureau figures, the fastest annual growth rate since 1992. Inventories for public companies have risen even more sharply. About half of the companies in the Russell 3000 Index require some inventory to function, and based on their latest quarterly statements, the median inventory growth for that group last year was about 26%.

But inventories alone don’t tell the whole story. Consumer demand has been unusually strong lately, so it makes sense for companies to spend more on inventory. One way to measure how well they match supply with demand is to track their inventory-to-sale ratio. In general, the lower the ratio, the better. The game is to have as little inventory on hand as possible without running out of supplies so that the money can be put to better use such as research and investment.

That measure shows that companies are very adept at managing inventories. The inventory-to-sales ratio for US companies has hit a low and tight range of about 11% to 13% since 1992 as measured by inventories relative to the previous year’s sales. That ratio has risen in recent months, but barely — 11.4% in April from a recent low of 11.1% last October.

The ratio has also remained surprisingly stable during the pandemic. It held steady during the early days of Covid in 2020 before falling to 11.1% in 2021 from about 12% the year before, presumably due to tighter supply and higher demand. But even with the recent surge in inventories, the ratio is not as high as it was before the pandemic.

Here too, public companies report comparable data. The median inventory-to-sales ratio for Russell 3000 companies has ranged from 11% to 14% since 2019. In 2020 it hovered around 11% and has risen modestly since then. It now stands at 13.6%.

So while inventories have risen over the past year, US companies generally seem to be managing inventories as well as ever. That’s helpful to keep in mind as you come across anecdotes of individual companies and even some industries struggling to navigate recent sharp turns in supply and demand. For now, at least US companies don’t have an inventory problem, and certainly not one that contributes meaningfully to the pace of inflation.

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist on markets. He is the founder of Unison Advisors, an asset manager.

More stories like this are available at bloomberg.com/opinion