Recovery In The Offing With Inventory Building (TIF, HD, JPM)

According to a report by Bloomberg, in what is a positive sign for the economy, companies have now started restocking their shelves. This will boost economic growth and hopefully keep the recovery on track this year. On March 22, James Fernandez, the Chief Financial Officer of Tiffany (NYSE: TIF), told analysts that the world’s second-largest luxury jeweler retailer is planning for a “high single-digit percentage increase” in inventories this year as it opens new stores.

On February 23, Carol Tome, the Chief Financial Officer of Home Depot (NYSE: HD), the largest U.S. home-improvement retailer had told analysts that we “will be building inventory.” David Hensley, director of global economic coordination for JPMorgan Chase & Co. (NYSE: JPM) in New York, said, “We’re moving into the restocking phase. We’ll see successive additions to growth in the first quarter, second quarter and third quarter.” In an April 4 interview on ABC’s “This Week” program, former Federal Reserve Chairman, Alan Greenspan, said, “The particular area of the economy which people are not putting enough focus on is how significant this rebound of inventories is going to be,” he added that the odds of a double-dip recession “have fallen very significantly in the last two months.”

According to a survey this month of 46 economists by Bloomberg News, the chances of a relapse into recession this year are 15 percent, down from 25 percent in September 2009. Data from the Commerce Department in Washington shows that the economy expanded at a 5.6 percent annual rate in the fourth quarter, the most in six years, with inventories providing the biggest boost by adding 3.8 percentage points to gross domestic product. With demand declining, companies had reduced stockpiles during the recession.

Business inventories had gone down to $1.3 trillion in September from a record high of $1.51 trillion in August 2008, according to the Commerce Department. They have since risen to $1.31 trillion in January. Greenspan said in his ABC interview that companies also will feel compelled to boost stockpiles because it’s taking longer to get the materials they need to run their plants. He said, “They’re going to have to build inventories to protect their production lines at an ever-increasing pace. And that is a self-reinforcing process.”

The negative element to all these positive developments is the possibility that sales won’t rise as much as companies expect. This will leave them with more workers and inventory than they need and thus set the stage for an economic slowdown later in the year. Harvard University Professor Martin Feldstein said in a March 23 interview with Bloomberg Television that the U.S. faces a “significant risk” of a double-dip recession. He said, “The consumer is going to have a very hard time. Unemployment remains an enormous problem.”