US outlook for second-half rebound of Asia imports darkens

Forecasts for a significant recovery in U.S. retail imports in the second half of 2023 seem to darken by the day. The weakening U.S. housing construction market; slipping retail sales; and still far too much apparel, household appliances, and furniture clogging warehouses, bode poorly for expectations of a significant restocking to take place for back-to-school season and the winter holidays. Economists' expectations of higher U.S. unemployment due to rising interest rates and a shaky financial market are testing consumer confidence to a degree not seen in the last three years.

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U.S. retail inventories are coming down but are still elevated. The inventory-to-general merchandise sales ratio has been steadily falling since July, according to the U.S. Census Bureau. The sales-to-inventory ratio of 1.38 for January, the latest reading available, shows Walmart, Target, and other big box retailers are making headway in readjusting inventory for slowing sales.

Publicly traded retailers stressed during first-quarter earnings calls that they're being cautious and are getting a better handle on inventory, as interest rates push up their carrying costs. Going forward, Macy's said it would expand its machine-learning investment to automate the shifting of strategic promotions from vendor direct inventory to owned inventory, while Nordstrom stressed to Wall Street investors that they're investing in better item tracking to manage inventory on the store level.

"Given the uncertain environment we are executing with agility, we took action starting in [the third quarter] to clear excess inventory and optimize our product mix," CEO Erik Nordstrom said on the company's first-quarter earnings call March 2. "As a result, we are now in a much healthier position with inventory levels down 15 percent from last year and in line with 2019 levels."

After the import surge

But there's still destocking to be done after coming off such highs, given the merchandise retail sales-to-inventory ratio was 1.32 in February 2020, right before the pandemic hit North America. A collapse in U.S. retail demand followed, then steadily rose to reach an almost 16-month high in July 2020. Record retail sales, fueled by pandemic lockdowns and federal stimulus paychecks, kept Asia imports above 1.4 million TEU monthly for 26 of the 27 months ended in October 2022, according to PIERS, a sister company of the Journal of Commerce within S&P Global.

Some of the biggest retailers have significantly pulled back on ordering, as reflected by their reporting of seasonally adjusted arrivals on a quarterly basis, according to Jason Miller, associate professor of logistics at Michigan State University, and a Journal of Commerce analyst. Dick's Sporting Goods has been receiving fewer goods since the second quarter of 2022, while Walmart started significantly moderating its receipt of inventory in early 2022. Target's seasonally adjusted arrivals peaked in the second quarter of 2022, at $23.4 billion and were down to $22.4 billion by the end of last year. The seasonally adjusted arrivals don't capture the complete pullback in ordering because they don't account for inflation and "we can safely assume there hasn't been deflation," Miller said.

Also worrying is that retailers of appliances, furniture, and building materials are sitting on inventories that haven't been this high for a decade, said Miller. U.S. single-family construction starts mildly rebounded 1.1 percent in February after five straight monthly declines, according to the U.S. Department of Commerce. Americans seem to have exhausted their appetite for new house projects and backyard sprucing. The inventory-to-sales ratio of building materials, garden equipment, and supplies was at 1.96 in January compared with 1.7 in February 2020.

Wholesalers of furniture and home furnishings are still sitting on too much inventory, and the decline in new housing starts won't help demand. The furniture inventory-to-sales ratio was 1.9 in January compared with 1.58 three years ago. Stripping out petroleum products of U.S. Census data shows wholesalers in general also have too much inventory, Miller said.

"We expect wholesale shipping trends to remain challenging in the quarter, with large accounts managing their inventory levels tightly, particularly in the Americas and in Europe ...," said Sunil Doshi, CFO at Fossil Group. The watch company is a wholesaler and retailer.

While the high inventories and broader economic alerts may suggest weakening import growth, the resilience of American consumers can't be written off. U.S. retail sales and food services may have slipped 0.4 percent in February on a year-over-year basis, but "not enough to signal a major deterioration in consumers' willingness to spend," Oren Klachkin, lead U.S. economist for Oxford Economics, wrote in a March 15 note. While spending might be upbeat in the short term, the commercial venture of the namesake university's business college does, however, warn that consumer confidence is fleeting, with savings drying up, borrowing costs expanding, wage gains easing, and still-high inflation.

Nonetheless, there's bound to be some bounceback from destocking because so much of the U.S. economy is consumption-driven, Luiz Gosling, senior vice president at consultancy AlixPartners, said during a March 20 virtual panel hosted by Stifel.

"Forgetting about supply for a second, how much more depressed can demand get, until we start to see inventories recover both on the retail side and on the industrial goods side — as we approach late Q3 '23 and Q4 '23, or perhaps early in August or September this year?," he said.

Three scenarios for the trans-Pacific

How muted or strong second-half volumes are plays directly into the three scenarios for the trans-Pacific trade that maritime analyst Lars Jensen outlined at the Journal of Commerce's TPM23 conference. Jensen, CEO of Vespucci Maritime and a Journal of Commerce analyst, said March 1 he was leaning toward one where inventories are corrected in April and May, and there's a "strong peak season" in July, August, and September. Yet, he warned that there was still a risk that U.S. consumption collapses, which could then be compounded by a shift from goods to services.

"In that case, once we have depleted the inventories, demand does not pick up, and it does not pick up until the lead up to Chinese New Year 2024," Jensen said. "In that case, the market is going to look really bad for all of 2023."

The third scenario is that enough container lines decide that there's no stopping a price war and they chase market share, believing they have enough cash from more than two years of record profit to withstand the rate bleed.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.