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


  1. Jake,

    You already point out the distortions from farm products, but is Medill Reports even correct? Go graph the inventory/sales historical data back to '92

    Grocery and Beer and Wine have been effectively flat through the crisis.

    Paper can fall another 10% to its historic (since 1992) low, Furniture 10%, Motor Vehicles 15%, Hardware 20%, Machinery 20%, and the most scary: Metals 30%, Lumber 50%, Petroleum 60%.

    That won't all happen at the same time, but don't you think the companies are driving to reduce their inventory? The only 3 areas on an upward trend are food, lumber and drugs (and for drugs, that's a 3 month bounce off an all time low). Why should we believe those historic lows will hold when others haven't:

    Drugs set new lows in the last 6 months, as has commercial equipment, computers and electrical goods, chemicals and apparel. Companies are being driven to further supply chain efficiency and the data shows they are finding ways to do it.

    It may take a few reports to see things turn, but given how much slack seems to be implied in the basic materials, and that pretty much everything is still falling as rapidly as it was 6 months ago, inventories still have a ways to fall when looking through my lenses. Hard to believe we won't blow through record lows for inventory to sales given we're at 1.12 and the record low is 1.11 (June 08)

  2. Jake - Tom already makes the point I was going to with more detail. Recall our exchange on the I:S ratio a while back? While Inventories were falling the I:S had shot way up as the result of the economic cliff dive and had a long way to go to get back on trend. Different evidence but similar argument to yours and Tom's.....not just the Q4 surge is Inventory and aberrational but in fact it didn't happen and is an artifact. That's going to surprise a lot of people when it comes home to roost.
    Good job on continuing to dig thru the data.