Tuesday, December 22, 2009

Mother Of All Inventory Recoveries Already Peaking?

As I mentioned before, there is a fat chance that mother of all inventory recoveries is already peaking. Economists at Societe Generale are nailing it down today:
Based on the incoming data, it looks increasingly likely that much of this positive boost will be realized in Q4. This is good news and bad news. The good news is that the economy is likely to end the year on a very positive momentum. Whereas our initial forecasts pegged Q4 GDP at 3.6%, it now looks more likely that we will see growth well in excess of 4%. A 5%-handle is not out of the question. In this high-growth scenario, inventories would contribute as much as 3.5% in Q4 (or 0.875% not annualized). The bad news is that this would close about 80% of the current gap between production and demand, leaving less upside from inventories for 2010.

An interesting feature that emerges in the modeling
of inventory cycles is the asymmetry between production undershoots (currently -1.1%) and the positive contributions to growth that follow (forecast at +1.4%). This asymmetry captures the virtuous cycle that typically takes hold as the initial production gains boost employment and consumption, triggering the need for outright inventory gains. Our current forecasts assume very little inventory accumulation beyond the production catch-up. If employment gains materialize and consumption gains become more sustainable, the positive feedback mechanism could inject some new life into the US inventory cycle.

Globally, the inventory cycle is also moving along.
Asia has led the way, but industrialized economies did a lot of catching up through the course of 2009. Based on the inventory indices within PMI surveys, the US experienced the largest inventory drawdown during the crisis, and as such, may be experiencing the largest positive contributions from the inventory cycle. The UK is also closing the gap relatively quickly, while Europe still appears to have some “juice” left in its inventory cycle. This is good news, because the prospects for a successful transition to consumer-led growth are somewhat more limited in Europe.

So, enjoy the positive momentum into year-end, and
fasten your seatbelts for the transition to demand-led growth in 2010.
Click on charts to enlarge, courtesy of Societe Generale.

Markets are surely pricing in demand-led growth in 2010 and 2011. Without government support it is likely to fail soon, as private sector deleveraging is set to continue...

Click on chart to enlarge, courtesy of Morgan Stanley.

Interestingly ... when corporate sector will join the government efforts? As long as China continues to support its current economic model, it is not going to happen soon...

Was it Milton Friedman who said that income polarization reduces the velocity of money?

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