Inventories in the United States are expected to rise because last year’s restocking trend has come to a screeching halt, according to the international economic advisory firm Oxford Economics.
The unprecedented strains in supply chains in recent years mean inventories were unusually lean, the company explains, adding that the resulting wave of restocking is one reason why economic growth has continued to surprise to the upside.
There are plenty of reasons behind the resilience of the economy over the past year, from the stock of excess savings to the continued strength of the labor market, the OE economists admit. But they assert that an overlooked factor unique to this cycle is the continued boost it gets from restocking by firms
“Inventory is no longer low relative to sales and – with the notable exception of the auto sector – inventories in many sectors now appear bloated,” Oxford Economics says. “With sales growth slowing and interest rates rising further, we expect a sharp slowdown in inventory accumulation.”
As supply chain issues eased and consumers shifted their spending away from goods toward services, real private inventories rose at an average pace of $125 billion annualized in 2022, allowing businesses to rebuild depleted stocks.
“Our base case is that inventory accumulation swings from a positive for GDP growth in 2022 to a negative in 2023, helping to drag the overall economy into recession,” the firm forecasts.
The upside risk to that view is if companies decide to continue building inventories over the coming years as a buffer against supply disruptions.
This inventory bloat will exert a real influence on economic growth, the firm points out. “While inventories are likely to be a drag on the economy this year, perhaps the bigger point over the medium term is that, thanks to the supply shortages of the past few years and growing U.S.-China tensions, inventories are re-emerging as a large source of volatility in the GDP statistics.”