Wholesale Trade: Another Bad Report, Inventories Decline, Prior Month Revised Way Lower; Expect Negative Revisions to 3rd and 4th Quarter GDP; What About Autos?
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Economists missed the wholesale trade report numbers by a mile. The Econoday Consensus Estimate for today's trade numbers was +0.2% in a range of 0.0% to 0.4%. The actual report (for October) came in at -0.1%.
That's bad enough, but some of the much touted inventory build for 3rd quarter (See Wholesale Trade Inventories Surge Led By Autos) did not happen.
Last month's report had me scratching my head. I certainly didn't expect such a jump. And it didn't happen. Today, September inventories were revised from +0.5% to +0.2%.
From Econoday
Wholesale inventories fell 0.1 percent in October against no change for sales, keeping the stock-to-sales ratio for this sector unchanged at 1.31. Wholesale inventories are on the heavy side as this ratio is well up from 1.22 this time last year. Year-on-year, inventories are up 3.6 percent which is well ahead of a 3.7 percent decline for sales.Positives for Production?
Inventory builds reflecting falling sales include metals and autos, though strong sales of the latter at the retail level point to a bounce back for related wholesale sales. Inventory draws reflecting rising sales include furniture, apparel, and farm products.
Businesses including wholesalers watch their inventory levels carefully, limiting unwanted overhang as much as they can especially when sales are slow. The decline in October inventories, together with a sizable 3-tenth downward revision to September to plus 0.2 percent, may be negatives for third-quarter GDP but are positives for the production and employment outlooks. Watch Friday for the business inventories report which will include data from the retail sector.
Bloomberg comments "[Wholesale trade inventories] may be negatives for third-quarter GDP but are positives for the production and employment outlooks."
Let's investigate that claim with a dive into the actual Census Report on Wholesale Trade for a chart and more details.
Inventories to Sales
The inventory-to-sales ratio is clearly in the danger zone. Over-optimism across the board is generally what causes these spikes.
Year-on-year, inventories are up 3.6 percent but sales are down 3.7 percent. Inventories contributed heavily to rather anemic GDP growth this year.
What About Autos?
Inquiring minds may be wondering about autos. So, let's take a look at autos and other categories.
click on chart for sharper image
Let's put some key numbers in a table to make them easier to read.
| Inventory and Sales - Percent Change From Year Ago | ||||
|---|---|---|---|---|
| Group | Sales | Inventories | Sales-to-Inventory Ratio Current | Sales-to-Inventory Ratio Year Ago |
| US. Total | -3.7 | 3.6 | 1.31 | 1.22 |
| Durable | -2.2 | 2.5 | 1.66 | 1.58 |
| Automotive | 2.3 | 13.1 | 1.77 | 1.6 |
| Furniture | 6.4 | 9.9 | 1.63 | 1.58 |
Take a good look at autos. Sales are up 2.3 percent but inventories are up 13.1%. Across the board, inventories-to-sales seem way out of line.
Unless sales pick up dramatically (and I highly doubt they will), inventories will be a huge drag on growth that will not only negatively impact 3rd Quarter GDP estimates, but also GDP estimates for multiple quarters looking ahead.
Mike "Mish" Shedlock
