Inventory Build? Nope...

Bloomberg with some faulty analysis:

Inventories at U.S. wholesalers rose more than twice as much as forecast in October as companies stocked up to meet the biggest sales gain in seven months.

The amount of goods on hand compared with sales in October held at the highest in almost a year, indicating companies may be growing confident about the outlook for demand to spur production. Recent data showed November retail same-store sales rose more than forecast, signs of momentum in the economy before the end of the year.

“The inventory cycle is maintaining its solid momentum,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York. “With final demand showing more signs of life, it will build on itself. It means better output but also maybe more imports.”

That would be great... if it were true. The reason for the huge jump in sales and inventories was not due to a surprise pickup in the economy, but rather due to inflation (the sales / inventory levels are nominal, not real).

As an example, the chart below shows the spike in farm products and petroleum inventories. Ignoring these two line items would have resulted in a jump of 0.6%, an improvement (though ALSO largely due to inflation), but much closer to 0.5% estimate.



Source: Census

Wholesales Sales and Inventories Grow

The AP reports:

Inventories held by wholesalers rose for a fourth straight month in April while sales rose for a 13th consecutive time. Both gains were encouraging signs that point to a sustained economic recovery.

Wholesale inventories increased 0.4 percent last month after a 0.7 percent gain in March, the Commerce Department said Wednesday.

Sales increased 0.7 percent in April, helped by higher demand for autos, lumber, computers and electrical equipment. The rise followed a 2.4 percent surge in March.

The hope is that a sustained rise in demand will prompt businesses to step up orders and restock depleted shelves. That would give a boost to factories and prompt them to increase hiring.

As EconomPic has detailed, these figures are all in nominal terms (see here). As a result, some of April's figures look "juiced"... most notably lumber which jumped another ~10% in price during the month. More broadly, commodity prices jumped 1.94% in April (per the DJ UBS Commodity Index) hence the reason for some of the strong figures. The strength in electrical, hardware, and computer equipment is a good sign however, but is offset somewhat by machinery.

Sales


Inventories

Going forward, get ready for some poor interpretation when May's figures are released next month... commodities dropped 6.9% during the most recent month, thus expect a poor headline number in nominal terms.

Source: Census

Wholesales Sales Jump... How Much is "Real"

Peter Boockvar (via The Big Picture):

March Wholesale Inventories rose .4%, a touch below expectations of a gain of .5% and with a 2.4% rise in sales, the inventory to sales ratio fell to a record low of 1.13 months down from 1.16 in February.

Thus, while we’ve seen a big reversal in the absolute level of inventory drawdowns that has lifted GDP over the past 4 quarters, the restocking that typically follows in past recoveries has been muted. Of course though, the backdrop is very positive for production if the pick up in end demand becomes sustainable.

Auto inventories at the wholesale level rose for a 2nd straight month but are still down 11.2% y/o/y. Inventories of computers rose for the 6th month in the past 7 and are up 10.7% y/o/y but the sales of computers are up 15.4% y/o/y. Wholesale inventories of machinery fell for the 14th straight month.

The chart below shows the components of the jump, which is widespread.



But as EconomPic has detailed before... these are in nominal terms (unfortunately no time to break out how much is real vs. nominal). The biggest increase was in lumber, which jumped ~15%. Unfortunately, the price of lumber also jumped ~15% in March (and is up a whopping 50% YTD) and the second largest jump was in petroleum, but oil jumped ~7% in March (and has since collapsed a bit).

I am hopeful with the reduced inventory levels should the economy pick up, but don't read too into the whopping sales figure.

Source: Census

Explaining Inventory Rebuild

I received a comment asking for better clarity as to why this morning's Wholesale Sales / Inventories report may be good news (stronger sales, less of a freefall in inventories)... before I dive in, please note that the below assumes all the figures are real (i.e. adjusted for inflation, which they are not). Here goes...

First the Legend

Red = Wholesale Production (rolling three month change); as measured by three month change in sales +/- the three month change in inventory (if inventories increase, then production = sales + change in inventories as some production was used to add to inventory levels).

Blue = Wholesale Sales (rolling three month change)

Orange = Variance between the two



As can be seen there was a negative feedback loop when the initial financial crisis hit that resulted in sales falling AND actual production plummeting (business just sold out of inventory rather than re-order stock) due to all the uncertainty (the initial decline likely caused sales to drop further as businesses stopped receiving new orders, which caused production to drop even further....)

The good news (now) is that when the inventories stopped freefalling, production levels actually ramped up faster than sales as new orders flowed right through inventories. As detailed at the top of this post, production is calculated from sales +/- the change in inventory, thus as long as the negative change in inventories becomes smaller (it doesn't need to grow), the production level increases relative to sales (which it did starting last summer and is now ~5% higher than actual sales).

This led to a huge amount of the GDP growth in Q3 and Q4 (~2/3 of all growth in Q4 was inventory rebuild). My whole point is that the sales level is actually showing decent growth too, thus the base (ignoring inventories) for production is growing. Add to that base any incremental impact of an actual inventory rebuild and you have the makings for some very good news.

Source: Census

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

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

Breaking Down Wholesale Inventories

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.



In other words, this was a nominal gain, thus will not positively impact GDP in Q4.

Source: Census

Q2 GDP Downside Revisions Coming?

Peter Boockvar (via the Big Picture) takes a look at yesterday's wholesale inventory release (been traveling, thus the reason for the late posts):

June Wholesale Inventories, which make up about 25% of Business Inventories, fell a greater than expected 1.7% vs a forecasted drop of .9% and May was revised down by .4% to show a decline of 1.2%. The greater than expected fall IF followed by a similar drop in Business Inventories, will lead to a revision downward in Q2 GDP as the inventory drag would be more than expected.

Back to Peter:

Because sales rose .4%, the inventory to sales ratio fell to 1.26, the lowest since Oct ‘08 when it was at 1.21. While the inventory is somewhat old news, it gives us a snapshot of how the quarter ended and further quantifies the extent of the inventory contraction. It also should follow that the greater than expected drag in Q2 should lead to much less of one in Q3. Business Inventories are out on Thursday.

Don't fret green shoot worshippers. Any Q2 downward revision (Q2 is SOOOO.... last week) means upside potential for the Q3 rebound.

Source: Census

Wholesale: Sales Up, Inventories Down

Reuters with the details:

U.S. wholesale inventories shrank for the ninth month in a row in May to $402.24 billion, their lowest level since August 2007, government data showed on Thursday.

The 0.8 percent drop was smaller than the 1.0 percent decline analysts polled by Reuters had expected. The Commerce Department also revised April's fall to 1.3 percent from the 1.4 percent reported last month.

Sales at merchant wholesalers rose 0.2 percent, beating analysts' expectations that they would be unchanged and pushing the inventory-to-sales ratio, a measure of how long it would take to deplete current stocks, down to 1.29 months' worth from April's 1.31 months. That was the lowest since a matching ratio in November.

Wholesale Sales (not all good news, look at the drop in metals)


Wholesale Inventories (Petroleum due to the jump in price)


Change in MoM Sales less Inventories

Source: Census

Wholesale Sales Debacle Continues...

You sure the worst is behind us? Even though inventories dropped along with these sales, the inventory to sales ratio continues to rise.



Source: Census

Good News Alert! Wholesale Sales Up, Inventories Crash

As the saying goes, inventories can't go negative. Thus, at some point these businesses will have to reorder. Especially if sales continue to surprise to the upside.

Per the WSJ:

U.S. wholesale inventories in February fell by the most ever even as sales rose modestly, according to a report that suggested businesses were getting control of their stocks of goods. Wholesale inventories decreased by 1.5% compared to the prior month, falling to a seasonally adjusted $419.34 billion, the Commerce Department said Wednesday.

Inventories fell a revised 0.9% in January; originally, supplies were seen down 0.7%. Sales of U.S. wholesalers climbed by 0.6% in February to a seasonally adjusted $319.73 billion. The last time sales climbed was June 2008, so the increase was a promising sign for an economy that went into recession in December 2007. January 2009 sales fell a revised 2.4%; originally, sales for the month were estimated 2.9% lower.

Sales


Inventories

Source: Census

Long Booze and Drugs / Short Oil and Autos...

We already looked at Wholesale Sales month over month, here's year over year.

Wholesale Sales: Durable Goods Down... Nondurable Up

Bloomberg reports:

Sales at U.S. wholesalers fell four times faster than inventories in January, indicating businesses will pare orders further in coming months. Sales slumped 2.9 percent to $326.1 billion, the lowest level in more than three years, the Commerce Department said today in Washington. The 0.7 percent decrease in the value of stockpiles followed a revised 1.5 percent decrease in the prior month. It was the fifth straight monthly drop, the longest such stretch in almost seven years.

Source: Census

Wholesale Shipments: Booze and Cigarettes

Census details:

Shipments of manufactured durable goods in January, down six consecutive months, decreased $7.5 billion or 4.0 percent to $182.4 billion, revised from the previously published 3.7 percent decrease. This also was the longest streak of consecutive monthly decreases since the series was first published on a NAICS basis in 1992 and followed a 1.5 percent December decrease.

Shipments of manufactured nondurable goods, up following five consecutive monthly decreases, increased $1.0 billion or 0.5 percent to $187.0 billion. This followed a 5.1 percent December decrease. This increase was due to petroleum and coal products, which increased $2.7 billion or 9.4 percent to $32.0 billion.

Source: Census

Wholesale Inventories Rising Dramatically

In response to my post on Wholesale Sales, GreenAB asks:

Do you have a chart of this data (industry sales ratio)? Vehicle inventories rose 1.7 percent, after increasing 1.5 percent the prior month, while auto sales fell 8.1 percent, today’s report showed. That pushed the industry’s inventory-to-sales ratio up to a record 2.31 months...

You want it? You got it...

Bloomberg further details:

Wholesalers had enough goods on hand to last 1.27 months at the current sales pace, the highest level since 2002. Sliding demand in the U.S. and abroad signals a further pullback in production as companies try to work through their stocks of unsold goods at warehouses, worsening the recession.

More interesting (to me) is the year over year change in the inventory sales ratio.

In other words, even if final consumer demand picks up, wholesalers won't necessarily be buying from producers as they already have the inventory piling up.

Source: Census

Great Depression II = Rock n' Roll

I'm going to pretend that machinery = guns so that we can get the trifecta of Guns, Drugs, and Booze as the only things people are buying (besides food). I'm not sure if I'm scared or excited by this...

Source: Census

Wholesale Trade: Sales Cliff Dive

I'll file this as a "better late than never post". Reuters reported last Thursday:

U.S. wholesale inventories fell in November while sales posted a record decline, a government report said on Friday.

The Commerce Department said U.S. November wholesale inventories fell 0.6 percent after a revised 1.2 percent decline in October. November wholesale sales plunged a record 7.1 percent after falling a revised 4.5 percent in October.

Wall Street economists surveyed by Reuters expected wholesale inventories to fall 0.8 percent in November. A month earlier, the department reported October inventories were down 1.1 percent while sales fell 4.1 percent.

Looking at the rolling 3-month change in wholesale trade sales, we see levels down almost 50% on an annualized basis.



Breaking out the sales by sector, we see there was "nowhere to hide" with petroleum and autos leading the way.



The drop appears to have surprised businesses, as inventory spiked which will add to the deflationary pressures we've seen over the past few months (PPI should verify this with Thursday's release) as businesses attempt to shed these excess inventories as a discount.



Why the huge drop in sales? Consumers are less willing (or able) to borrow to make purchases. MSNBC reports:

Consumer borrowing dropped by a record $7.94 billion in November, a Federal Reserve report showed on Thursday, the latest evidence that households were unwilling or unable to take on more credit.

That was the biggest decline since the data series began in January 1943, and was far steeper than the $0.5 billion dip that economists polled by Reuters had expected.

The November decline represented a drop of 3.7 percent, the largest percentage fall since January 1998, when it was down 4.3 percent.

Source: Federal Reserve, Census

Wholesale Trade Sales (July)

July 2008 sales of merchant wholesalers were $410.6 billion, up 16.5 percent from the July 2007 level. A lot of this growth can be explained by rampant inflation we've seen over the past year.



This has had a profound impact on the wholesale business as the composition of sales have been altered. For example, food and petroleum sales now compose 22% of all sales, up from just 16% a year ago, while automotives have been reduced 1.5% to just 6% of sales.

Petroleum Wholesale Analysis