Wholesalers Cautious On Inventory For Good Reason

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By Jeffrey P. Snider

Wholesale sales for June 2016 declined slightly, -0.6%, year over year. Since February, sales have flattened out in unadjusted terms. Seasonally adjusted, wholesales sales rose nearly 2% from May 2016, and are up $17 billion from February. Of that increase, however, $11.5 billion was petroleum alone. Taking out the volatile swings in oil and oil prices, wholesale sales ex petroleum have been stagnant to lower since December 2014.

Since these estimates are for June, they are still reflecting the spring seasonality, if somewhat more intensely because of the change in oil prices (oil didn't peak until June 8, and then it remained near $50 for most of most of the month).

Wholesale inventories were essentially flat, unadjusted year over year, for the fifth consecutive month, suggesting that wholesale businesses remain highly cautious. Since sales aren't anywhere near what would be consistent with an actual turnaround, inventory ratios linger at recessionary levels across the board. That likely accounts for this belated reluctance to add inventory, while also explaining why production both here and overseas and also indications of future production (also here and overseas) remain on the contractionary side.

The fact that wholesale sales, at least in the spring, aren't getting worse does not necessarily mean the economy is getting better. That would seem to be the new view in wholesale inventory, an updated outlook in sharp contrast to last spring, where "transitory" expectations were more sympathetic. Wholesale inventory overall was up 5.4% in June 2015 over June 2014, but was up 6.3% outside of oil. Those increases were slightly slower than the pace of inventory expansion throughout 2014, meaning if 2015 introduced some slight caution, 2016 showed why.

That would suggest that wholesalers, if not the rest of the supply chain, will be looking for an actual and sustained uptick in sales before turning up in inventory once again. That may be a tall order, especially in important sectors like autos, where the inventory imbalance remains rather dire. The inventory-to-sales ratio for wholesale motor vehicles ticked up again to 1.82 (seasonally adjusted) in June, the second highest since early 2009 (March 2016 being the highest). That level is actually more imbalanced than June 2009, and is the highest level for any June in the entire series:

With automakers already speaking softly about a sales "plateau" while still intending to maintain profit targets, that can only mean continued subdued, if not further suppressed, production levels and volume. At some point, this inventory needs to be liquidated, which can only put heavy downward pressure on prices, inducing the typical recessionary spiral. The various car manufacturers have already admitted to huge incentives just to keep sales flat:

Automakers already have responded by boosting incentives to customers. Ford felt the sting in July, blaming a rare down month for its sport utility vehicles on GM's early July promotion offering 20 percent off sticker prices. Average discounts rose 13 percent in the first half while industry sales rose 1.5 percent, according to Autodata.

Even though it has taken nearly two years to get to this point, it isn't at all encouraging that the US economy has managed to stave off recession so far. The media continues to suggest there is only a binary option, and since there hasn't been recession, there must not be one in our immediate future. That just isn't the case, as the inventory overhang continues to hang on. In other words, from this wholesale data as well as manufacturing indications elsewhere (including overseas), the lack of further contraction does not suggest the US economy will avoid recession (or just further depression); instead, inventory implies that the manufacturing sector contracted two years just to get closer to the point where one might be triggered.

In a typical business cycle, these kinds of merging trends would only take a few months to produce sharp responses. Now, it takes years. That's not progress; time is the biggest cost.