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GDP Trouble? Wholesale Inventories Fall but Sales Collaspe

Posted by Joseph Trevisani on Apr 8, 2016 4:17:08 PM

American businesses are having modest success in reducing their long buildup in inventories but sales are falling even faster and the reduction in goods orders will drag on U.S. economic growth as long as it persists.

Wholesales inventories fell 0.5 percent in February, the fifth decline in a row and the steepest since May 2013, according to the Commerce Department on Friday. Analysts in the Bloomberg poll had forecast a drop of 0.2 percent. The initially reported 0.3 percent inventory build in January was revised sharply lower to -0.2 percent.  Inventory levels in February were just 0.6 percent higher than the previous year, the smallest rise since June 2010.   

Inventories are a direct contributor to economic growth. Wholesalers place orders that they expect to move quickly into the retail sales cycle. When unsold good pile up firms reduce orders to manufacturers until they can clear their inventory and economic activity stumbles.

Economists had considered that the original 0.3 percent gain in inventories in January suggested the economic drag created by the prior four months of inventory reduction was at an end.  Instead, as the revision shows, the component of wholesale inventory that is included in the calculation of GDP dropped 0.7 percent in the first two month of the quarter. 

The GDPNow tracking measure of the Atlanta Federal Reserve, probably the most widely followed GDP estimate, reduced its forecast for first quarter annualized GDP to 0.1 percent from 0.4 percent on April 5th, citing todays inventory statistics.  This gauge has fallen precipitously in the past two months from a high of 2.7 percent on February 12th.

Sales at the wholesale level in January and February were also weaker than expected and initially reported.

Sales for February came in at -0.2 percent, missing the 0.2 percent estimate. January’s -1.3 percent first report was downgraded by almost 50 percent after adjustment to -1.9 percent. It was the fourth straight monthly decline.

Annual sales were 3.1 percent lower in February, the 14th straight negative month, after a 3.7 percent decrease in January.

At the February selling pace it would take 1.36 months to liquidate inventory, a slight improvement over January’s 1.37 months. Firms have had some success in reducing their inventory overhang despite the continuing decline in sales.  The historical average is 1.24 over the 22 year history of the series.  

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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