Wednesday, March 10, 2010

Promising Wholesale Figures

WSJ reports:

U.S. wholesalers' inventories unexpectedly fell 0.2% in January, the Commerce Department said Wednesday, as surging demand pulled goods off shelves in the first month of the year.

Wall Street analysts had expected inventories to rise by 0.2% in January. The unexpected decline followed a downward revision in December's inventory level showing December inventories contracted by 1.0%, rather than the 0.8% drop originally reported.

Sales by U.S. wholesalers in the first month of 2010 were up 1.3% to a seasonally adjusted $346.7 billion, the latest data showed. It was the tenth straight monthly increase in sales, according to the Commerce Department. Sales were particularly strong for cars and groceries.

The decline in inventories appears to be good news for the U.S. economy. A pileup in inventories doesn't always bode well for future production or for future economic growth, and a decline may indicate that demand is outpacing supply.

The amount of wholesale goods on hand relative to sales was 1.10 in January, a record low. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio in December was 1.12.

If one were to believe these figures, then on the margin this is likely a detractor for Q4 GDP and Q1 GDP (a decline in inventory means less was actually produced to meet end-user demand - I am just not convinced actual inventories declined for real in January, just as I didn't believe they actually jumped back in November). Either way, the jump in end-user demand is good news (as long as it is real and not nominal... not sure how to figure out the flows though).

Wholesale Sales

Wholesale Inventories

The question is when will businesses not only slow the trend of a decline in inventory levels, but actually build? If end-user demand continues to show its head, we may FINALLY be getting there (though there is likely plenty of excess capacity ready to meet this demand before it flows through to hiring and capex spending).

Source: Census


  1. Just to make sure I understand how this works:

    1. Inventories fell in December by more than we previously thought they had fallen. This decline in inventories means nothing to the economy.

    2. Inventories fell January instead of increasing. This decline in inventories is a good sign for the economy.

    3. The real question is when inventories will increase instead of falling, because an increase in inventories would be a VERY good sign for the economy.

    Is that right?

  2. Greg:

    No to #1... as I stated:

    "If one were to believe these figures, then on the margin this is likely a detractor for Q4 GDP and Q1 GDP"

    For Q1, I question whether Q1 was "real" vs. a nominal price decline (following a nominal price increase in Q4). If inventories actually fell in January, then this is bad for January, but good for future production (given a level of end-use, production will occur in the past or future... low inventories means it will happen in the future all else equal).

    In response to #3.... yes. As detailed above, an increase would mean that the actual production in the economy increased in that period(sales can be either from production or inventories... whereas sales less inventory decline = actual production).

    This is how the cycle works and why inventory rebuilds lead the economy out of recessions... the question this time is will it be enough with a struggling consumer.

    I hope that helps clarify.