Tuesday, February 9, 2010

Wholesale Inventories and Q4 GDP Revisions

Professional economists were predicting inventories to "continue to rebuild" from November's level. Amateur economists (i.e. me) that actually looked into November wholesale inventory data noted it was not "real". As stated a month back.

Friday's surprise 1.5% gain in Wholesale Inventories (i.e. what appeared to be an inventory rebuild) was not real, just like last month's post Wholesale Inventory Correction isn't "Real" in October. As can be seen below, the spike was entirely to Farm Products (Wholesale Inventories ex Farm Products was 0.1%) and Farm Products (both livestock and grains) rocketed in price in November.
Thus, not a huge surprise that inventories did not match expectations (per the AP):
The Commerce Department said Tuesday that wholesale inventories were reduced 0.8 percent in December. Economists surveyed by Thomson Reuters had expected inventories to rise by 0.5 percent during the month.
All that happened in December (broadly), was just continued weakness and a reversal in price level for a number of these items (and just wait until January's wholesale release that must deal with this collapse).

Medill Reports reports what happens to Q4 GDP as a result:
The inventory drop occurs on the heels of a 1.6 percent increase in November, which was the largest monthly jump since July 2004, according to the Department of Commerce.

Economists initially forecasted a modest 0.5 percent increase in inventories, according to a poll by Thomson Reuters. The surprise slide could influence the Gross Domestic Product, a prospect that persuaded some analysts to ratchet down their GDP outlook.

“The drop was unexpected,” said Ellen Zentner, senior U.S. macroeconomist with Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We are shaving close to 0.3 percent off our GDP estimate.”
Sounds similar to what I guessed before the Q4 GDP figure was even released. My third prediction as to the main driver of the print...
  • The MASSIVE impact from the inventory rebuild, which I suspect will be revised down in coming quarters as it is realized that the inventory rebuild wasn't all real
Okay, I'll get off my pedestal as this does provide at least one positive opportunity. Namely, wholesalers are reaching the point that they can't continue to let inventories slide. Back to Medill Reports:
“Inventory levels are tight, but that’s a positive,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. “The more producers have to ramp things up to meet demand the more production levels increase and the number of hours worked increases.”
Source: Census