By Mark Pender

NEW YORK (MNI) – The subjective measure of customer inventories is
indicating that an inventory build underway in the manufacturing sector
is voluntary, according to Norbert Ore who heads the Institute For
Supply Management’s report.

The customer inventory index measures the assessment of
finish-goods inventories at respondents’ customers. The index has been
on the rise since June but at 43.5 in August is well below 50 to
indicate that finished goods inventories, at least, are still low, that
manufacturers remain guarded in what they hold for customers.

Yet the report’s inventory index, a measure of raw-material
inventories, has been over 50 for two months now and has, for the last
nine months, been over the 42.6 breakeven level as determined by the
Bureau of Economic Analysis.

The government’s factory data show a run of inventory builds for
both durable finished goods and total durable goods.

“Is the inventory build voluntary or involuntary? It’s a puzzle,”
said Norbert Ore in a phone interview with MNI.

“It would appear to be voluntary as long as customer inventories
remain below 50. Production is not slowing which is another indication
that it’s voluntary, and I don’t have any anecdotal indications that
it’s involuntary.”

Ore attributes the build in raw materials to manufacturers securing
inputs against the risk of supply gaps as production builds. The build
of raw materials would not be a concern were it not for tangible slowing
underway in orders.

The ISM’s new orders index, at 53.1, still shows month-to-month
growth but at the slowest rate since the manufacturing recovery got
underway in the second quarter of last year. Backlog orders, at 51.5,
are also building but at the slowest rate since December.

Government data show declines in total factory orders for June and
May, which are the latest months available, and show a disappointing
gain of only 0.3% in last week’s advance durable goods release.

Part of the slowing in orders may be due to the inventory build
itself as manufacturers, filling up their warehouses, see decreasing
need for inputs. Ore sees order growth increasing once the inventory
build slows.

“New orders need to strengthen up from where they are right now.
Taking new orders and subtracting them inventories shows only a 1.7
point spread which indicates a very strong inventory build is taking
place” (the spread is the lowest since February 2009).

“If the inventory build isn’t voluntary then we have a huge issue
on our hands.”

** Market News International New York Newsroom 212-669-6430 **

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