U.S. Economic Value Destruction: Interpreting Wholesale Trade Data

May.11.11 | About: PowerShares DB (DBC)

Look closely at the latest Wholesale Trade data, and you’ll find what looks just like inflation. Yet at the same time, you’ll note what looks like American demand destruction. But if global demand remains adequate, then prices should not give as we might expect them to. Thus there will be no counter-balance, and life will get harder for Americans, and the middle class will contract. American economic value is being destroyed, while the emerging world is enriched.

The U.S. Census Bureau reported the latest Wholesale Trade data covering the month of March. It showed a 1.1% increase in Wholesale Inventories, which was about in line with the 1.0% forecast by economists surveyed at Bloomberg. Wholesalers’ Sales rose 2.9%, which was even more impressive when considering that February sales were revised higher. March’s burst in sales against slower inventory growth led the inventory-to-sales ratio to improve to 1.13 from 1.16 in February. But closer inspection offers a less than sanguine perspective.

The change to February sales took its decline from -0.8%, up to a decline still of -0.3%. We speculate that February’s relative sales weakness was likely weather hampered. The rough winter, especially for the Northeast and Midwest, affected the economy in a significant way. We saw its effects across small business, as evidenced by decline in the NFIB Small Business Optimism Index, which continued that trend in April. But I also saw anecdotal evidence of trouble, as small businesses I survey were strangling this winter, and that ranged from bars and restaurants to hair salons and art galleries.

The harsh winter weather certainly hampered whatever slim construction activity that may have been scheduled for February. Perhaps that’s why sales of lumber and other construction materials climbed 7.3% in March. Certainly high ticket durable goods played a role in the March expansion, as durables sales climbed 2.3%.

Meanwhile, price increases across commodities definitely drove sales gains. An example of this can be seen in the 6.7% increase in sales of metals and minerals. Sales of petroleum and related products increased 7.9%, obviously on the rise in oil prices. Chemicals and allied products, which are tied to petroleum, saw sales increase of 6.3%.

The automotive sector was basically the only soft spot within the report, reporting wholesale sales down 1.4%. Yet this should not be a surprise either, considering that as gasoline gets expensive, demand should lessen for gas guzzlers.

Nondurables sales increased 3.4%, driven by gains in drugs (+1.4%), apparel (+1.4%), groceries (+2.3%) and farm products (+1.7%). Those last two lead one to worry about price rise, and then we think about the reported increases in apparel prices at several retailers as well. We’ve seen consumer staple companies complain about margin squeeze for months now, and finally we’re seeing them pass through price pressures to consumers (reference Kimberly-Clark (NYSE:KMB) for just one).

Within inventory changes, we noted a 3.9% decrease in Computer and Computer Peripheral Equipment & Software. This is not a good sign for business investment, and neither is the slim 0.4% increase in durable goods inventories. Automotive inventories were down 0.5%. Excluding the food-, petroleum- and commodity-related industries, we note drug inventories increased 3.0%. As you might imagine, all others were up significantly. Nondurable goods inventories in aggregate rose 2.0%.

If it looks like inflation, walks and talks like inflation, and smells like inflation, then it’s probably inflation. This report stinks of inflation and demand destruction at the same time, and therefore fits the puzzle characterizing today’s American economy. Increasing emerging market demand for goods and services is raising prices for goods, while not necessarily raising the financial well being of Americans.

What I’m seeing is economic value destruction of American wealth. We had better figure out quickly how to better benefit from emerging world development, because as American companies benefit from the leverage of their expertise overseas, that is not in turn employing enough Americans. Thus, the middle class we’ve grown so proud of may soon begin to contract.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.