Thursday, December 11, 2008

Wholesale trade confirms a crappy fourth quarter

Yesterday the Census Bureau released its wholesale trade report; it shows a quickly deteriorating economy from the bottom up. This report didn’t get a lot of air time, but it is one of the recession indicators used by the NBER and shows that the rate of economic decline is quickening. Based on this report, many professional forecasters will reduce their growth forecast for the fourth quarter of 2008 on the contraction in sales and the worse-than-expected inventory figures.

Highlights of the October report are:
  • Total sales declined -4.1%, driven down by durable (-4.2%) and nondurable (-4.1%) goods – the fastest decline since 1992 (when the series was started).
  • Ex petroleum – call this core - sales declined -2.9%.
  • The big monthly hits occurred in the following categories: automotive (-4.5%), electrical (-1.8%), metals (-5.2%), farm products (-6.1%), and petroleum (-11.2%).
  • There were monthly gains in 3 out of 19 categories – kind of like the last men standing – in machinery (+1.6%), drugs (+0.9%), and paper (+1.1%) - but the gains are subject to revision and will probably fall soon.
  • I saved the worst for last: The inventory to sales ratio grew to 1.16, its largest value since Feb. 2007. However, without petroleum, the inventories to sales ratio grew to 1.32, its largest value since Jun. 2003.
  • Wholesalers slashed inventories in October based on continued worse-than-expected sales figures; this is not good for the fourth quarter GDP report.
The report is particularly dreary for two reasons: (1) sales are declining at an increasing speed, and (2) inventories are sliding. Amid severely weak wholesale sales (at the distributor level), final sales are expected to be dismal. Investment and consumption will be weak for capital and machinery goods that are tallied in the investment, consumption (nondurables like autos) or export categories of GDP. California, Texas and New York account for 30% of all wholesale trade; these states will be particularly hurt by further weakness in wholesale trade. Since the pace of decline is quickening, the outlook for sales into 2009 has also worsened.

Second, inventories are sliding. In the third quarter, inventory build was an important contributor to economic growth; it added 0.89% to overall GDP growth, -0.5%. Going forward, inventory build is expected to subtract from economic growth alongside consumption, investment and exports. Fourth quarter growth is now expected to be even more abysmal.

On Friday, the business inventories report will be released. Since business inventories account for roughly 75% of September’s inventory build (wholesale activity accounts for the rest), this report will confirm the forecast for inventories and sales. It is likely to suggest that the fourth quarter will be weak.

Rebecca Wilder

1 comment:

  1. It is interesting that both nondurable and durable goods are falling at the same rate. We did see this coming, though, if you go by the sales ads. when momma don't buy, nobody buys. Love the buy one, get one free autos.