Businesses’ inventory levels are lean again. Tariffs could change that.
This holiday shopping season has been, by several measures, a pretty normal one. Businesses started bringing in their holiday inventory in mid-October, according to the most recent Logistics Managers’ Index. And consumers bought a lot of it in November, according to spending data from the Bureau of Economic Analysis that came out last week.
These normal, seasonal patterns are a big relief for businesses, since many have spent the last few years trying to get rid of excess inventory they built up early in the pandemic. But the prospect of additional tariffs in the coming year could cause many businesses to start building up their inventories again.
The kind of businesses that have made the most progress bringing inventories back to normal levels are big consumer retailers.
“So what we call general merchandisers, your Walmarts and Targets of the world, and Costcos,” said Jason Miller, a professor of supply chain management at Michigan State University.
He said many big retailers offered discounts to get rid of their extra goods. And consumer spending has been pretty strong.
Miller said it’s great that a lot of businesses aren’t hoarding inventory. That can be costly “because you’re not turning through your items quite as quickly. And also the longer it takes you to sell something, [it could] get damaged or just essentially go obsolete and lose value,” he said.
That said, there are signs that importers are bringing in extra inventory ahead of any new tariffs on imports from China, said Zac Rogers, a professor of supply chain management at Colorado State University.
He said he noticed a pickup in mid-December, around five or six weeks after the election. “To me, that suggests that now, because we’re worried about tariffs, a lot of inventory is getting pulled forward. Maybe a little earlier than would be expected.”
Rogers said if that continues, businesses might have a harder time holding extra inventory than they did a few years ago.
For one thing, interest rates are higher, which makes it more expensive to buy inventory. And if all that hoarding pushes up warehousing or trucking costs, importers would have to decide whether to pass those costs on to consumers.
“Consumers are very sensitive to costs, and so it’s going to be more difficult for importers to just slap those costs to a consumer base that honestly is tired of prices going up,” Rogers said.
Some businesses, though, might decide that the cost of extra inventory is worth it.
If a smaller wholesaler, for instance, needs to stock a good that could be hit with President-elect Donald Trump’s proposed 60% tariff on Chinese imports, “it may make sense to order an entire year’s worth ahead of time to get that product in and not pay 60% more,” said Jason Miller at MSU.
Meanwhile, Miller said, big retailers might choose to keep their inventories low and simply pass the cost of any tariffs on to consumers.