Country RiskArmada Corporate Intelligence have been keeping you abreast of what we thought was one of the big problems with Q2 economic activity – namely that it is a lot weaker than many thought it should be. The Chicago PMI came in at 46.2, contraction zone activity and far worse than the 52.3 posted in April.

But, media outlets had officials from the Chicago ISM all over the news today and one interesting piece of data that emerged was the relationship between inventory and new order activity. According to discussions with businesses in the Chicago region, 42% of them say that their inventories are “too high” and a significant majority are mentioning that they are higher than last November.

New Orders plummeted to 47.5 from 55.1 in April. That would make perfect sense if companies are feeling as though they are overstocked.

How does this play out? This is probably not a reflection on current or future business potential. Businesses should be strong in the summer and well into the second half. The problem came in the first quarter when companies beefed up on inventory – and for a variety of reasons, demand didn’t follow.

Companies now have to feed off of that inventory and it impacts near term activity. It can affect transportation, employment, raw material demand, energy consumption, etc. Companies are estimating that this fall, reorders will trickle in instead of coming in heavy waves.

We don’t believe that there will be a tremendous amount of further stockpiling of merchandise or raw materials unless prices are significantly weaker or if we see higher than expected summer demand. Strong summer demand would help pull inventories down and put the reorder cycle back in place. Inventories, as we said early this year, could be one of the biggest stories of 2015.

Source: Armada Corporate Intelligence