Today's Monthly Wholesale Trade report from the Census Bureau covering July was the latest in a wave of disappointing reports on business activity this year. Wholesale inventories remained very high, while sales turned in a seventh consecutive month of year-over-year declines.
Much of that sales decline is due to the fall in oil prices during the past year. But even after factoring that out, wholesale sales are either flat or declining, leading one to wonder how the economy could have grown at all during the past year or so. Josh Boak at the Associated Press appeared to understand that there are some problems out there, but his Thursday morning report understated their seriousness, largely because he doesn't seem to understand that a high level of inventories can be a very dangerous thing:
US WHOLESALE STOCKPILES SLIPPED IN JULY, WEIGHED DOWN BY OIL
Expectations for U.S. consumer spending appear to have dimmed in July, as wholesalers cut their inventories slightly and sales fell.
Wholesale stockpiles slipped 0.1 percent, while sales dropped 0.3 percent, the Commerce Department said Thursday. This follows a solid 0.7 percent gain in inventories and 0.4 percent sales increase in June.
Of all the things the economy needs, right now, another "solid" gain in inventories is not one of them. The more inventories increase while sales remain flat or in decline, the higher the inventory-to-sales ratio will be — and right now, it's already too high, as seen in the chart below from Zero Hedge:
The contrarians at Zero Hedge believe that this chart "screams recession." I'l agree that it's at least talking quite loudly — especially given that the ratio after subtracting the petroleum products sector, is up to 1.40 (data is available here with appropriate sector selections):
The AP's Boak acted as if he wasn't in the mood to believe what he was seeing:
The combination of falling inventories and sales are generally signs of slower economic growth. This is because companies are anticipating weaker sales in the coming months, causing them to reduce their stockpiles.
But the decline occurred in July despite clear positives for the economy in terms of hiring. Steady job growth since early 2014 has lowered the unemployment rate to 5.1 percent, a level usually associated with an economy at full health.
Sales by wholesalers have dropped 4.2 percent over the past 12 months, mostly because of the steep 35.7 percent decline in the petroleum category.
Despite the overall July decrease in stockpiles, wholesale inventories are at a seasonally adjusted $584.3 billion, 4.9 percent above a year ago.
Points (tieing into the bolded items):
- The AP reporter should be right about the impact of economic growth. But with record levels of food stamps, subprime car loans, vastly expanded student loans and Obamacare subsidies artificially adding to "consumption," the largest component in the Gross Domestic Product calculations, who knows? The identified items are "artificial" because they are accomplished either by government spending (i.e., "others' tax money) or by overgenerous credit-granting policies.
- The problem with continuing to push the "clear positives" of hiring is that years of such hiring generally haven't produced a great deal of consumer spending power. Why should now be any different?
- The inventories sentence is written as if the increase is a positive thing. It's not if the consumer demand isn't there — and from all appearances, the consumer demand isn't there.
Boak's readers will come away from his dispatch believing that while today's wholesale report indicates that there are potential problems out there, they aren't all that serious.
Oh yes they are.
Cross-posted at BizzyBlog.com.
