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Wednesday, December 9, 2009

Wholesale Inventory Correction Isn't "Real" in October

We've been waiting (and waiting) for the "mother of all inventory corrections" to provide a boost to the economy (EconomPic reported that there was no inventory correction in September). Upon reading the initial releases it seemed like this trend finally reversed course in October for the wholesale sector. Per the WSJ:

Inventories of U.S. wholesalers unexpectedly increased in October, breaking a string of 13 declines and suggesting production will pick up.

Wholesale inventories rose 0.3%, the Commerce Department said Wednesday. The mild increase came even with strong demand, indicating optimism among distributors over the economic recovery.

Sales of U.S. wholesalers climbed in October by 1.2% to a seasonally adjusted $326.17 billion, the seventh straight increase.

The 0.3% increase in inventories was the first since a 0.7% rise in August 2008. Economists surveyed by Dow Jones Newswires expected a 0.6% drop in October wholesale inventories.
In looking at the data, it seems there was an increase, though that increase in dollar terms was extremely concentrated in farm products and petroleum (without farm products inventories were actually negative).

Of more importance is that the increase in inventory isn't "real" (literally or figuratively). The chart below shows the percent change in each inventory category. So why isn't this real? Well, during the month of October the price of both petroleum and livestock spiked (as an example the price of crude oil was up in more than 12% October, while the price of lean hogs was up more than 15%), both more than the inventory increase of each.

In other words the actual level of the drivers of this report (farm products and oil) may actually be lower and it is this "real" level that feeds into GDP.

Source: Census