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Business & Financial

Trimmer Inventories Help

Robert S. Reichard, Economics Editor

A dd falling industry stocks to the list of indicators pointing to better days ahead. After rising sharply through much of last year, inventories are now returning to more normal levels. Result: Lower inventory-carrying charges and the increased likelihood that new orders will be quickly translated into new production. Part of the reason for these new stock declines can be traced to more cautious mill production strategies. But equally important is the fact that final demand, bolstered by an increase in 2009 holiday sales -- apparel shipments were up 5 percent above a year earlier in December -- and a pickup in incoming orders, has equaled or topped expectations. In any event, the latest government inventory figures tell the story. Mills making basic textiles like yarns and fabrics at latest report, for example, were holding only a 1.24-months' supply. That's down significantly from the 1.55-months' supply peak of early last year. Equally significant, downstream apparel holdings are down almost as much -- with totals put at a 1.65-months' supply now versus the 1.78 level of last January. Also worth noting: U.S. textile mills have actually been outperforming other industries when it comes to trimming last year's big inventory overhangs. Months' supply of basic textiles on hand at last report, for example, was down an impressive 20 percent vis-à-vis a year ago. That's more than double the 9-percent average decline for all manufacturing companies over the same period.

priceindexfeb10

Other Positive News

Reduced inventory levels are only one of several signs pointing to better days ahead. For one, the improved ordering pattern of late last year is spilling over into 2010. Thus, according to the Institute for Supply Management, a grassroots group representing the nation's top purchasing executives, both mills and apparel makers are continuing to see a fairly strong inflow of new bookings. And a not-too-different picture seems to be shaping up in the shipment sphere, where mill sales are finally bottoming out after the huge, nearly 20-percent decline reported during 2009. A gradually improving industry outlook also is suggested by more and more forecasts calling for as much as a 3- to 4-percent increase in overall consumer purchases this year. Point to keep in mind here: What happens to aggregate retail sales will almost certainly spill over into the textile and apparel sectors. Moreover, gains of this magnitude also should help keep mill and apparel prices firm -- at or even slightly above current levels. Note, too, that even mill employment numbers look a bit better, with workers making basic fibers and fabrics actually showing a small advance over the latest available month after years of virtually uninterrupted decline. Combine all these encouraging signs -- lower inventories; rising order, production, shipment and retail numbers; and stable to slightly higher prices -- and industry profits also should begin to recover. True, gains probably won't be sufficient to recoup last year's sizable declines, but they should be enough to set the stage for a more solid bottom-line recovery in 2011 and 2012.

An Uncertain Trade Outlook

Imports, however, could present problems. True, incoming shipments of textiles and apparel on a square-meters-equivalent basis -- reflecting poor consumer demand -- declined about 8 to 9 percent last year. But all this should be changing. Late 2009 figures, for example, show the first increase in these imports in more than a year. Moreover, it is again China that seems to be spearheading the new drive -- with incoming totals from that country running some 13 percent above a year ago at last count. And make no mistake about it: It's China, accounting for some 40 percent of U.S. textile and apparel imports, that sets the tone. In any event, Beijing's actions will bear especially close monitoring over the next few quarters. For one, there's growing global pressure for China to make new upward revisions in its undervalued currency, the yuan -- an undervaluation that has kept Chinese exports artificially cheap at the expense of foreign competitors. Most of these other countries are becoming increasingly irritated over the fact that this unfair trade advantage will enable Beijing's economy to grow at an imposing 8- to 10-percent rate this year -- four times as fast as the 2- to 3-percent pace anticipated for the rest of the world. China, meantime, continues to insist that it won't bow to any new revaluation demands. On the other hand, it has dropped hints of some eventual changes. As for when these might take place, some global analysts are now talking about the possibility of some modest yuan relief, but not before this fall or winter.

February 16, 2010

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