March 2011 | Commentary | In Perspective

Consuming Confidence

Tags: Supply Chain Management, Global Economy

America is consuming again. More importantly, it also appears to be producing.

Some consumer confidence is certainly behind the latest uptick in manufacturing orders and production. One indicator of growing consumer confidence is that inventories are shrinking. So, while some manufacturing activity is likely moving into inventory, it is to replenish, not merely build, stocks.

Customer inventories took a dive in 2009 and have since tracked below the 50-percent mark, indicating growth, according to Institute of Supply Management (ISM) figures. Inventories bottomed out in early 2010, then exhibited a slight spike, though still hovering below the “overstock” level. They quickly returned to their low level, then started a slow, steady climb as caution dictated conservative replenishment strategies.

As inventories bumped along at a slowly increasing level into late 2010, back-orders dropped below the 50- percent “growth” mark, reflecting corporate strategies to keep inventories lean, but meet demand until year’s end.

Back-orders then popped up over the growth line, and stand at 59 percent in ISM’s recent report, indicating that at least in some industries, orders are outstripping inventory replenishment.

Another good piece of news drawn from the recent ISM figures is that exports have continued to rise, and at a faster pace. That trend, says ISM, is 20 months old. Meanwhile, imports are still growing, but have leveled for at least the last two reporting periods. So, more U.S. production is serving overseas customers along with the rise in domestic demand.

Looking at the broader economy, Ben Bernanke, chairman of the Federal Reserve, noted, “Following the stabilization of economic activity in mid-2009, the U.S. economy is now in its seventh quarter of growth.” Testifying before the U.S. Congress, he said, “Last quarter, for the first time in this expansion, our nation’s real gross domestic product matched its pre-crisis peak.”

One problem that remains the focus of attention, and could limit consumer confidence, is the continued high unemployment rate. The improving economy appears to be producing everything but jobs.

Another wild card is the instability in the Middle East. The Egyptian protests have quieted as the regime change protesters sought plays out. But in neighboring Libya, the situation remains volatile— so volatile that Hugo Chavez has offered to broker a settlement. Some may view that offer as adding fuel to the flames, but Chavez, who received a human rights award in 2004 from a group founded by and named for Libya’s Muammar al-Gaddafi, may have one thing Western governments do not: access. And, as many economists and political analysts observe, one factor that could put the fragile U.S. recovery in jeopardy is volatile oil prices.

As long as the struggle in Libya and other oil-rich Middle Eastern countries continues, the risk remains for higher oil prices to consume some of the fragile confidence that has been building slowly with each incremental quarterly gain.