1. The $1.2T Question for the Second Half of the Year
There is a question looming for the second half of the year, and it stems from inventory building activity in the first half of the year. Many retailers and wholesalers placed early orders for products to attempt to get ahead of tariff risk. For some sectors and products, purchasing managers tried to build a year or more of inventory on hand to get beyond trade policy uncertainty and to allow time to make alternative sourcing decisions if needed. But the big question remains: was the inventory building activity sufficient to get to the end of the year or will it fall short?
The implications are significant for the US supply chain stretching across transportation and logistics, warehouse utilization, energy prices, US manufacturing and more. In 2022 when the country was emerging from the global supply chain crisis, inventories surged and became overbuilt. Many companies were sitting on more than a year of inventory, and it took time to reduce these stocks of items. As a result, the transportation industry went through a secular recession that lasted from 2023 to earlier this year and led (in part) to the exit of Yellow Freight from the industry.
Looking forward into the second half of the year, data would suggest that despite efforts to build inventories, companies are still sitting “light”. Federal data shows that inventories (relative to sales volume) are collectively still 2% lower than they were in the same period in 2019. Some categories such as General Merchandisers (big box retailers) are 9.8% lighter than the decade average prior to the pandemic and 6% lower vs. 2019 levels. Monthly surveys from the ISM through July also show inventories generally in-line or lower than expected and inventory sentiment suggests that purchasing managers ‘feel’ like they are sitting ‘lighter’ then they probably should be.
If this trend holds, with consumer spending and corporate investment continuing to be stable, inventories should remain lean, and one of two scenarios will be present in the latter part of the year (both of which are good for manufacturing and distribution). First, inventories deplete faster than expected and companies move into a scramble mode to fill stockouts. Or secondly, the supply chain moves into a systemic and rhythmic replenishment cycle for the first time in nearly 5 years and performs something more akin to the period from 2010 to 2019. Again, in either event, this should be a good situation for manufacturers and those handling distribution.
Additional Reading: ISM July Report
2. 100% Bonus Depreciation Boosts Factory Orders for Equipment
A provision in the One Big Beautiful Bill Act of 2025 (OBBBA) allows firms to depreciate 100% of the purchase of certain industrial equipment, structures, and farming equipment if those items were purchased after January 19, 2025, and if the equipment or structure is placed into service before January of 2031. This is a continuation of a similar program initiated under the 2017 Tax Cuts and Jobs Act (TCJA) which was slowly phasing out.
Economic data shows that similar bonus depreciation programs have historically led to an 18% increase in purchases of machinery, equipment, and manufacturing structures and infrastructure, primarily by pulling forward long-term purchases. The Congressional Budget Office estimated that this provision would result in nearly 75% of a decade of industrial spending would be front-loaded into the first 5 years of the Act. However, this surge in near-term spending is expected to boost GDP overall by 0.5 percentage points according to the Tax Foundation and could create as many as 85,000 new jobs in the process.
Some of this pulled-forward spending is already evident. According to the Census Department’s New Factory Orders Data from June, it appears that many firms anticipated the July passing of the OBBBA and placed early orders to get ahead of potential tariff risk and take advantage of the bonus depreciation benefits that would result from the OBBBA. Industrial machinery orders were up 6.9% month-over-month in June, the fastest growing segment across the entire US industrial complex.
Experts agree that there are many considerations and provisions that must be met to fully take advantage of this benefit. Interested firms should inquire about the advantages, risks and trade-offs to see if they fit in with your overall financial strategy.
Additional reading: Census Bureau; OBBBA Full Text
