Inventory Size Doesn't Matter if No One Buys

By MARK GONGLOFF The hot new pastime among economists is watching dust gather on factory shelves. The Institute for Supply Management on Friday releases its manufacturing index for April. Economists expect the index, which measures the mood of purchasing managers, to extend a string of encouraging data points, edging up to 38.3 from 36.3 in March. That is still a very low level. Anything below 50 indicates factory output is contracting, while anything below 41 suggests the economy still is in recession. But manufacturing has climbed from its deepest trough since 1980, adding to evidence that the worst may be over. Economists will pay particular attention to the ISM's inventory readings. A massive shelf-clearing helped sink gross domestic product by an annualized 6.1% in the first quarter. The need to restock empty shelves could boost growth. In an encouraging sign, the ISM's inventories index plunged in March to its lowest level since 1982, while its index of new orders rose to its highest level since last August. The gap between the two is a good proxy for future production, notes Joseph Brusuelas, chief economist at Moody's Economy.com. In March, it rose to its highest level since September 2007. When orders for new stuff come in and manufacturers' shelves are bare, they have to make new stuff to fill those orders. The ISM also asks purchasing managers to gauge customer inventories, and that index rose in March and has been above 50 for the past eight months. That indicates purchasing managers still think their customers' inventories are too high. That suggests there is more shelf-clearing to come. And if consumer spending doesn't exactly roar back after the recession, factories won't feel compelled to do much more shelf-stocking. That will keep production and economic growth sluggish. ================================= March Feb. 2009 2009 ================================= Manufacturing index 36.3 35.8 --------------------------------- Prices paid 31.0 29.0 Production 36.4 36.3 New orders 41.2 33.1 Backlog of orders 35.5 31.0 Supplier deliveries 43.6 46.7 Inventories 32.2 37.0 Customer inventories 54.0 51.0 Employment 28.1 26.1 New export orders 39.0 37.5 Imports 33.0 32.0