By New Deal Democrat
While this morning's report on wholesale sales and inventories for February isn't good news for Q1 GDP, in the longer term it means that the inventory correction is working itself out.
Let's start with the updated inventory to sales ratio for wholesalers, which declined .01 from 1.37 to 1.36:
Wholesale inventories dropped 0.5 percent in February, the Commerce Department said on Friday, the sharpest decline since May 2013. Analysts polled by Reuters expected a 0.1 percent decline.The government also revised its reading for January to show a 0.2 percent decline in inventories rather than a 0.2 percent rise.
Wholesale sales, meanwhile, slid 0.2%.
More often than not, a big increase in the inventory to sales ratio is accompanied by a recession. But a minority of the time, it is just an inventory correction - most importantly, in 1998 when the US$ soared, just as it did in 2014-15. In either case, sales lead inventory, as shown in this graph through December (FRED won't update until next week):
In the inventory correction scenario:
- Pressure of the USD eases - which it already has this year.
- Commodity prices firm - which appears to have happened beginning last November.
- New orders increase - which we have from the ISM new orders index in the first three months of this year.
- Inventory continues to decline - this is now established for wholesalers for the last 5 months.
- Sales increase - not yet (as of February)!
The weekly oil chart is still very bearish. While prices broke through upside resistance a few weeks ago, they have since retreated below important technical levels. I'd need to see a move above the 50-week EMA to be sold on the rebound or bottoming story.