Friday, January 30, 2009

GDP, Imports and You

The economy contracted by an annual rate of 3.8 percent in the fourth quarter of 2008. So I am guessing they are either multiplying the fourth quarter numbers by 4 to get this annual rate, or they are taking information for all of 2008, which includes the fourth quarter.

I am guessing it is the former, so for the 4th quarter I am assuming GDP declined by .95%

Not surprising since the national unemployment rate rose by 0.9% in the fourth quarter alone, and if we assume that a 1% increase in the unemployment rate translates into a 2-3% fall in GDP.

But wait, GDP fell by around the same proportion that unemployment rose. What gives, the GDP should be in the ballpark range of 1.8% to 2.7%.


The gross domestic product — a crucial measure of economic performance —
shrank at an annual rate of 3.8 percent in the fourth quarter of 2008. The decline would have been much steeper — more than 5 percent — if shipments of goods had fallen as sharply as orders.

“The difference between 3.8 and 5.1 percent is the inventory buildup,” Nigel Gault, chief United States economist at IHS Global Insight, said. “My only explanation is that companies could not cut production fast enough.”

With inventory accumulation gone, the economy will contract in first quarter at more than a 5 percent annual rate, Mr. Gault predicted.

So manufacturers did not cut production in the same proportion to falling consumer demand. So warehouse inventories should be bulging, right? Or goods should still be in shipment.

So we are back to the 1950's model of supply chains, where warehouses function as a demand buffer, with production slowing until the unused inventory is depleted and more factory orders are made. So much for all the promise that the modern distribution center and just in time production.

This buildup makes sense for automobile manufacturers, or durable goods where there is a long supply chain, many producers and assemblers along the way and where consumer demand is hard to gauge. To see an example of this, just look at the buildup of cars at the ports of Long Beach.

For the smaller, single source products (plastics, apparel, shoes, small electronics manufacturing, etc) the cutback is huge. These are the types of products that would come in huge containers from Asia and would need a modern distribution center, since these are high velocity goods.

This means that any buildup in inventories for Inland Empire distribution centers is likely to be minimal. Port volume is already declining, meaning that someone in China got the message that Americans are not in the buying mood anymore.

But if you are in desperate need to temporarily house inventory overflow because your suppliers never got the memo, and are located in the Inland Empire, have I got a deal for you.

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