Tuesday, March 10, 2009

Merchant wholesalers and manufacturing data point toward a long haul on inventory draw

Manufacturing and wholesale sales and inventory data tell the following story: inventory build likely subtracted from GDP in January; sales are anemic; firm production is still probably too high for the negative sales growth; and firms will probably be drawing on inventories for quite some time (i.e., no production).

Here is what the Census Bureau reported today about merchant wholesaler sales and inventory activity for January:
January 2009 sales
of merchant wholesalers, except manufacturers’ sales branches and offices,after adjustment for seasonal
variations and trading-day differences but not for price changes, were $326.1 billion, down 2.9 percent (+/-0.9%) from the revised December level and were down 15.4 percent (+/-1.1%) from the January 2008 level. The December preliminary estimate was revised downward $0.3 billion or 0.1 percent.

Total inventories
of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $424.2 billion at the end of January, down 0.7 percent (+/-0.4%) from the revised December level, but were up 1.0 percent (+/-0.9%) from a yea
r ago.
The news is not good (of course). The chart (above) lists the inventory and sales activity in wholesale and manufacturing markets since January 2007. As you can see, sales are declining at a faster rate, -2.9%, than are inventories, -0.7%; this suggests that production is probably still too high for the weak demand for wholesale goods. Hence, the inventory to sales ratio continues its unfettered surge.

The final piece of the January inventory puzzle comes out on Thursday, when the report on total business (retail + manufacturing + wholesale) sales and inventories is released.

But the outlook for GDP is grim. Even if the decline in sales slows substantially, firms will be drawing on inventories over the near term; that's the rational course of action. Therefore, expect for inventories to subtract from Q1 2009 GDP, rather than add to it (like in Q4 2008).

Rebecca Wilder

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