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Feb.8, 2016

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SURFACE & DOMESTIC TRANSPORTATION TRUCKING | RAIL | INTERMODAL | AIR & EXPEDITED | DISTRIBUTION www.joc.com THE JOURNAL OF COMMERCE 73 By William B. Cassidy IN THE HAND of economic cards dealt to U.S. shippers and their transportation provid- ers this year, inventories are a "wild card," in the words of Ben Hartford. "We've heard anecdotes about (destocking) on the indus- trial side," the senior equity research analyst for R.W. Baird & Co. told the SMC3 Jump- Start Conference in January. "Will we see destocking in the first half? We don't know." As 2016 opened, inventory levels were generally high, largely because of lukewarm holiday sales, shippers, logistics providers and trucking executives said at the confer- ence. Discounts on clothing and other items are still deep. "We didn't have the consumer engage in 2015 to the extent that we thought with the fall in oil prices," Hartford said. "The trend is probably still downward," with consumers remaining cautious. "That leads to some risk that we would see some destocking in 2016." Holiday sales rose 3 percent in 2015 over 2014, to $626.1 billion, according to the National Retail Federation. That was less than the 3.7 percent increase the NRF expected. December sales dropped 0.2 per- cent from November. Online sales, however, surged 9 percent from the previous year to $105 billion. Inventories are on the minds of many logistics and shipping professionals. Stock- piles of goods are taking up tight storage space at U.S. warehouses. And longer inven- tory replenishment cycles translated to lower demand for trucking services in 2015. No one has forgotten the inventory correction of 2006, which preceded the so-called freight recession of 2007 and the actual recession of 2008 and 2009. "Our customers are concerned," one truck- ing executive said at the conference. "Busi- ness is a little bit softer than it normally would be." Inventory destocking is occurring some- where, based on data released in January by the U.S. Census Bureau. Overall, manu- facturing and trade inventories dropped 0.2 percent in November from October. That's the largest decline since 2011, accord- ing to Bloomberg. Retail inventories, however, increased, Census data show, suggesting that destock- ing on the industrial side and by wholesalers is simply shifting the pile of goods to retail businesses. Retail inventories were up 0.2 percent from October in November, and up 5.5 percent year-over-year. High inventories hold back GDP growth and depress freight demand, while pres- suring already-tight warehouse capacity. Because high inventories impede GDP growth, they are sometimes seen as a har- binger of economic downturn and recession. "An inventory overhang of as much as 2.5 percent needs to be removed," Donald Ratajczak, Regents Professor Emeritus of Economics at Georgia State University, said in a Jan. 4 commentary for investment firm Raymond James. "Sluggish GDP growth in early 2016 is likely." Inventories "won't drag us down into a recession," Emory University Economist Jeffrey Rosensweig said at the SMC3 con- ference. "We're not overstocked now, and in the long-term there will be a bit more of a downtrend," he said. "We'll see growth in consumption." Compared to the 1990s and early 2000s, the U.S. isn't overstocked. In November 2005, the U.S. average retail inventory-to-sales ratio was 1.49. In November 2015, the ratio was 1.48, Census data show. But that's the highest ratio since the end of the recession. TAKING INVENTORY Disappointing holiday sales keep U.S. inventories high, softening demand for trucking Source: U.S. Census Bureau US RETAIL INVENTORY-TO-SALES RATIO n Retail inventories in December hit their highest levels since the end of the Great Recession in 2010. 1.3 1.4 1.5 1.6 1.7 1/1/08 11/1/15

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