Wednesday, August 5, 2009

An Inventory Build Story?

Consider the above chart. Notice two things. First, inventories have been dropping since the second quarter of 2008. Secondly, inventories have contracted at a sharper rate then the 2001 recession. Let's play out a hypothetical: let's assume that demand increases sharply. What happens?

With the U.S. Senate considering a vote on putting more money into the government's "Cash for Clunkers" program, some auto dealers are raising concerns about a new threat to the incentive program: tight inventories.

The clunker program, which offers subsidies of as much as $4,500 to consumers who trade in older vehicles and buy new, more fuel-efficient models, sparked a surge in sales in late July, leaving many dealers with lean stocks of cars and trucks on their lots.

"We've got an inventory issue," Mr. Kelleher said.

Chrysler's stocks are tighter than those of most other auto makers because the company shut down all its plants while it reorganized in bankruptcy court in May and part of June, and shipments to its franchises ground to a halt.

Still, Toyota Motor Corp. only had enough Prius hybrids in stock at the end of July to last 13 days at the current rate of sales, according to Autodata Corp. It had a 34-day supply of Corolla compacts and a 37-day supply of Camrys.

Auto makers consider a 65-day supply optimal, and frequently stock dealers with enough vehicles to last 80 or more days. Inventories have been declining in recent months because auto makers reacted to a deep downturn in sales by slashing production.