Inventory correction continues as positive news emerges

The inventory correction cycle entered its tenth straight month in March as manufacturers cut inventories by a further 0.2% to $62.1 billion, Statistics Canada reports.

March’s decrease was divided between goods-in-process (-1.0%) and raw material (-0.5%) inventories. Offsetting the decline, finished-product inventories recorded the largest one-month gain since June 2001, rising by 0.9%.

The rise in finished product inventories came amidst encouraging signs that the inventory correction may be starting to bottom out, as manufacturers contemplate rebuilding their stocks of goods.

According to April’s Quarterly Business Conditions Survey, manufacturers were much more upbeat about their levels of finished-product inventories, with 82% indicating that their finished-product inventory was about right, up from 66% in January. Moreover, only 14% indicated that their finished-product levels were too high in April, down from 30% in January.

Nevertheless, March’s overall inventories were still at their lowest level since June 2000 and were off 5.5% since peaking at $65.8 billion in November 2000. The trend for inventories, which has been declining since April 2001, continued downward in March, albeit at a more moderate pace.

For the second straight month, the computer and electronics industry was the main contributor to the inventory decline, as high-tech manufacturers cut inventories a further 4.6% to $4.9 billion. This marked the fourth consecutive monthly decline for this industry, where inventories have been generally falling since their peak in November 2000. Despite the recent uptick in shipments and unfilled orders, computer and electronic product manufacturers have continued to scale back their inventory holdings as uncertainty continues to cloud the longer term outlook of the high-tech sector. The drop in inventories, coupled with a mild upturn in shipments, contributed to a sizeable decline in the computer and electronic product industry’s inventory-to-shipment ratio in March (2.73), the lowest level since May 2001. The ratio is a measure of how long it would take to deplete inventories at the current pace of sales.

Another major contributor to March’s inventory decline was the motor vehicle industry; manufacturing inventories fell 3.7% to $1.7 billion.

Partially offsetting this month’s decrease were higher inventory levels in the chemical products (+1.5%) and petroleum and coal products (+3.9%) industries. The increase in petroleum and coal products was the fourth consecutive monthly rise and comes after inventories hit a 25-month low in November 2001.

With March shipments decreasing faster than inventories, the inventory-to-shipment ratio edged up for the first time in three months to 1.49, but remained well below the nine-year high of 1.56 set in October 2001. The trend of the inventory-to-shipment ratio continued to show signs of levelling off in March.

March also saw a slight rise in the finished-products inventory-to-shipment ratio (0.47). The ratio, which had been rising since mid-2000, has held fairly steady since last autumn as manufacturers succeeded in lowering their finished product inventories.