The return of the inventory cycle

Great Moderation? This refers to the period before the global financial crisis of 2007-09 during which there was a marked fall in the volatility of growth in rich countries. Explanations for it ranged from wiser monetary policy (yes, really) to globalisation. In fact, much of it was down to something more mundane: smaller inventories. One authoritative study found that more than half the improvement in the stability of rich-world growth was explained by diminished inventory cycles.The classic stockbuilding cycle, in which inventory changes add to the momentum of on the way up (through over-ordering) and on the way down (through stock clearances), is showing signs of a revival. Some big American retailers, notably Walmart, have reported large increases in stocks. In part this is the result of errors in forecasting demand. But it also reflects an increase in the desired level of inventories. As just-in-time production gives way to just-in-case stockpiling, the scope for greater volatility in and in corporate earnings, is increasing.