Dive Brief:

• Private inventories grew by more than $67 billion in the third quarter, according to the Bureau of Economic Analysis' (BAE) quarterly release of National Income and Product Accounts.
• This is the fifth quarter in a row in which inventories have grown. The last estimated decrease in inventories was in the second quarter of 2018.
• The inventories to sales ratio for retailers, manufacturers and wholesalers was up year-over-year for August, the most recent numbers available from the Census.

Dive Insight:

This uptick in inventory is at least partially explained by the uncertainty from tariffs.

Yeti was one of the most recent companies to mention this strategy. The company upped its inventory by 33% in in a "strategic buildup" ahead of list four tariffs," CFO Paul Carbone said on the company's earnings call last month.

Adrian Grigg, vice president of business development at Flexe, said inventory build-ups to deal with tariffs are a constant, but tend to come in waves. 

Buying more inventory ahead of tariffs is not a permanent solution for retailers, Grigg said.

"It's definitely a short-term, sort of reactionary solve to a really near term problem," but a complete shift in manufacturing strategy can take 12 to 18 months, he said.

Deciding to stockpile, while being a short-term Band-Aid, does come with risk, according to Paul Wellener the U.S. industrial products and construction leader with Deloitte.

"If you do build inventory, there is risk in that inventory that you may not have the right things," Wellener ​said in an interview with Supply Chain Dive.

Demand can change and then the company could be stuck with inventory it has to discount, write off, or scrap, Wellener said.

Stockpiling as a way to avoid tariffs might not be the only reason for the continued rise in inventory levels.

Businesses will build up inventory for a variety of reasons like avoiding stockouts or SKU diversification. One trend that could explain an uptick in inventory is e-commerce, according to Grigg.

"We've got the company up the street from us here in Seattle that figured out early that the best way to reduce transit time and last-mile shipping costs is by putting the inventory out close to the customer or as close to the customer as possible," he said, referring to Amazon.

Grigg says many of their customers are looking for ways to replicate the strategy by expanding into new markets, which results in an increase in inventory.

An example would be a company shipping out of two nodes might need 100 widgets of inventory, but when they expand to five nodes that would increase to 130 or 150 widgets to avoid stockouts, he explained. 

"So in aggregate, you've got more inventory to support e-commerce than you previously did coming from fewer distribution points," he said.

Amazon saw it's inventory value increase 25% after it announced plans for one-day shipping. Grigg said his customers are currently trying to figure out how to keep up with the promise of one-day shipping and still make money on e-commerce orders.

The only way to do this is to ship at normal speeds through a traditional 3PL and to minimize the length of the final miles, which is accomplished by spreading inventory closer to the markets where it is expected to sell.

Of course, there is always a chance that larger inventories are an indicator of issues in the broader economy, too. The number of trucking companies to go out of business this year has more than doubled the 2018 total. And while consumer spending continues to grow, lower manufacturing output could be another warning sign.

"We saw a lot of the big transportation carriers miss Q3 earnings as a result of that. So that's one indicator. And if the data suggests that warehousing inventories are on the rise, that might be another indicator that there's an economic slowdown coming," said Grigg.