WMT Walmart Inc

By Paul Page 

A year-long pullback in U.S. business inventories will likely continue through the rest of 2016 as retailers and manufacturers remain cautious amid uncertain demand and the prospects for higher interest rates, according to a report on U.S. logistics.

The tight lid on inventories, a drag on U.S. economic growth in the first quarter, comes as companies are paring back after overstocking in recent years while they tried to adjust to changes in consumer buying patterns, said the authors of the annual State of Logistics report released Tuesday. The report was produced by A.T. Kearney for the Council of Supply Chain Management Professionals.

Inventories in previous years grew faster than the economy as a whole, a trend that halted in 2015 as growth slowed and big retailers like Wal-Mart Stores Inc. and Target Corp. scaled back, said Sean Monahan, a partner at A.T. Kearney and the main author of the report.

"We would expect to see inventories through the rest of the year increase in line with GDP growth," Mr. Monahan said. "We won't see a return to a 5% growth rate [for inventories] that we had been seeing."

The inventory pullback has roiled the logistics sector.

It has hit transportation companies hard since they are holding expensive assets that they added between 2011 and 2014. Lighter volumes have led ship operators and trucking companies to slash their prices, eating into profit margins. The trucking industry has 75,000 to 80,000 more trucks than companies need to move goods, said Marc Althen, president of Penske Logistics, a sponsor of the CSCMP report.

"As a carrier, you're either parking it or lowering your rate to keep the trucks spinning," said Mr. Althen.

Logistics services companies -- which do not own transportation equipment -- have fared better, and taken advantage of the lower rates. And the move to get goods closer to cities and consumers in response to the growth of online sales has fueled stronger earnings at industrial real estate companies that manage warehouses.

Retailers began slowing down their inventory replenishment around the middle of 2015 as consumer sales faltered. A rush of goods following the resolution of labor strife at West Coast ports, where enormous stacks of imports had piled up early in 2015, added to a big mismatch between supply and demand.

A big correction last fall meant businesses ended up adding barely more inventory overall last year than they had in 2014. The CSCMP report showed total business inventories expanded by $60 billion, or just 0.2%, to $2.515 trillion in 2015 while nominal gross domestic product grew by nearly $600 billion from the year before.

Total business inventory as a percentage of GDP fell to 14% from 14.5% in each of the previous three years, and the lowest share of GDP since 2010.

"When things slow down it takes time to adjust, and at the same time when the economy picks up companies still try to be efficient and burn off inventories," said Rick Camacho, vice president of global supply chain operations at Hershey Co. "The supply chain is a big ship and it takes a long time to slow it down and a long time to get it moving again."

Mr. Monahan said a rising cost of capital has dampened investment, with the inventory-carrying rate -- or the cost of holding goods -- rising 5.1% last year.

One cloud on the horizon is a potential a Federal Reserve interest rate increase later this year, which Mr. Monahan said would further temper business investment.

Write to Paul Page at paul.page@wsj.com

(END) Dow Jones Newswires

June 21, 2016 09:14 ET (13:14 GMT)

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