US: Wholesale Trade

Tue Mar 10 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.1% -0.3% to 0.2% 0.3% 0.1% 0.0%

Dislocation is the word that comes to mind when reading today's wholesale trade report for January with inventories up a tame looking 0.3 percent against, however, a huge 3.1 percent plunge in wholesale sales. This is the largest drop in sales since May 2009. The mismatch drives the stock-to-sales ratio up very sharply, to 1.27 from 1.22. The 1.27 is the heaviest reading since July 2009 and the month-to-month increase is the sharpest since November 2008. Data on the factory sector, released last week with the factory orders report, also showed an unusual build in January with the shipments-to-inventory ratio rising to 1.36 from 1.34.

Builds relative to sales are spread across most industries in the wholesale sector especially metals, hardware, electrical goods, and furniture. These readings point to weak demand in the industrial and housing sectors. Petroleum also shows a heavy build relative to sales, signaled well in advance by the weekly petroleum status report where inventories have been bulging. January's outsized build relative to sales isn't due to autos or farm products, two key industries where the inventory ratios are actually down slightly. Inventory ratios for professional equipment, including computers, are also down.

The drop in wholesale sales is a puzzle given no worse than mixed readings on business and consumer spending. Winter months are often distorted due to weather and related adjustments and perhaps today's results will be smoothed out in the coming months. On Thursday, the business inventories report will be posted and will include the still missing component for retail where, however, sales dropped sharply in January.

Market Consensus Before Announcement
Wholesale inventories look heavy, rising 0.1 percent in December versus a noticeable 0.4 percent decline in sales at the wholesale level. The mismatch bumped up the stock-to-sales ratio by 1 notch from 1.21 to 1.22 which is the heaviest reading since way back in the troubled days of late 2009. This ratio was at 1.17 through the middle of last year but has since been moving higher. December's unwanted wholesale build was centered in the non-durable component where sales, in contrast to durable goods which rose 1.1 percent, fell 1.7 percent in the month. Here the culprit is petroleum where sales, reflecting both price effects and lower demand, fell 13.7 percent in the month.

Wholesale trade measures the dollar value of sales made and inventories held by merchant wholesalers. It is a component of business sales and inventories.

Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a slower rate of growth that won't lead to inflationary pressures. Wholesale sales and inventory data give investors a chance to look below the surface of the visible consumer economy. Activity at the wholesale level can be a precursor for consumer trends. In particular, by looking at the ratio of inventories to sales, investors can see how fast production will grow in coming months. For example, if inventory growth lags sales growth, then manufacturers will need to boost production lest product shortages occur. On the other hand, if unintended inventory accumulation occurs (i.e. sales did not meet expectations), then production will probably have to slow while those inventories are worked down. In this manner, the inventory data provide a valuable forward-looking tool for tracking the economy.