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US Wholesale Inventories Rise, Remain a Drag on GDP

Posted by Joseph Trevisani on Nov 10, 2015 6:28:01 PM

Stockpiles at American wholesale firms and their sales rose equally in September, leaving the important inventory to sales ratio unchanged at 1.31 percent, its highest since the 2008 recession.  

Inventories increased 0.5 percent, the largest gain in three months following a revised 0.3 percent jump in August that was initially 0.1 percent, reported the Commerce Department today. Economists had forecast smaller 0.1 percent rise. 

Sales also advanced 0.5 percent on the month topping the 0.1 percent prediction. It was the largest jump since April’s 1.7 percent increase. The August number was adjusted up to -0.9 percent from -1.0 percent.

Inventories have risen for 28 straight months with the exception of a 0.3 percent decline in July.    In September 2014 the inventory to sales ratio was 1.20. It has gone up every month since with the exception of March when it dropped to 1.29 from February’s 1.30 and April when it was unchanged.

While inventory accumulation initially adds to GDP in the quarter when the goods are produced, if they are not promptly sold, the lingering stockpiles subtract from economic activity in subsequent quarters as companies cut back on production until the inventory is cleared.  

The effort to reduce these bulging warehouses over the summer was a central cause of the third quarter’s collapse in GDP to 1.5 percent from the prior three month’s 3.9 percent annualized rate.  

The retail sales numbers for October, which will be issued by the Census Bureau on Friday, will be crucial in determining production levels in the fourth quarter. Economists are predicting a 0.3 percent increase in overall retail sales and a 0.4 percent gain in the ex-auto and control group numbers.

All three categories are coming off disappointing results in September.

Overall retail sales rose just 0.1 percent, following August’s flat reading and they were only 2.4 percent ahead on the year. That is about half the non-recessionary historical average. 

Sales without those of automobiles and parts were down 0.3 percent in September after a 0.1 loss in August. So far this year these sales have averaged a 1.0 percent annual gain each month, less than a fourth of the historical average.

And finally the so called 'retail sale control group', the statistic that matches the consumption contribution in the government’s GDP calculation is expected to rise 0.4 percent in October. This would follow a 0.1 percent drop in September and a 0.2 percent gain in August. The annual increase in this 'control group', which comprises retail sales minus the purchases at automobile dealers, building suppliers and gas stations, was just 2.9 percent in September, about two-thirds of  its long term average. 

Last week the Labor Department reported that the economy had created 271,000 jobs in October, well ahead of the 185,000 forecast and the highest total this year. The unemployment rate dropped to 5.0 percent its lowest in seven years.

Average hourly earnings jumped 0.4 percent on the month and 2.5 percent on the year, for the best post-recession annual gain. But unless this recent add-on translates soon into increased consumer spending, inventory is likely to remain a drag on GDP for the remainder of the year. 

.   

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

 

 

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