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posted on 14 February 2020

December 2019 Business Inventories Level Remain Elevated But Improved

Written by Steven Hansen

Headlines say final business sales data (retail plus wholesale plus manufacturing) improved month-over-month. The rolling averages improved. Inventories remain elevated.

Analyst Opinion of Business Sales and Inventories

Inventories remain elevated but they declined. Our primary monitoring tool - the 3-month rolling averages for sales - improved. As the monthly data has significant variation, the 3-month averages are the way to view this series. Overall business sales are better than the low point in 2015 - but are well below average for the values seen in the last 2 years.

Note that inflation-adjusted sales are in expansion this month.

Econintersect Analysis:

  • the unadjusted sales rate of growth accelerated 4.1 % month-over-month and up 3.3 % year-over-year
  • unadjusted sales (but inflation-adjusted) up 1.1 % year-over-year
  • unadjusted sales three-month rolling average compared to the rolling average 1 year ago accelerated 0.6 % month-over-month, and is up 0.8 % year-over-year.

  • unadjusted business inventory's growth rate decelerated 0.7 % month-over-month (up 2.1 % year-over-year), and the inventory-to-sales ratio is 1.32 which is recessionary.

US Census Headlines:

  • seasonally adjusted sales down 0.1 % month-over-month, up 1.7 % year-over-year (published +1.0 % last month).
  • seasonally adjusted inventories were up 0.1 % month-over-month (up 2.2 % year-over-year), inventory-to-sales ratios were up from 1.39 one year ago - and are now 1.40.
  • market expectations (from Econoday) were for inventory growth of 0.0 % to 0.1 % (consensus +0.1 %).

The way data is released, differences between the business releases pumped out by the U.S. Census Bureau are not easy to understand with a quick reading. The entire story does not come together until the Business Sales Report (this report) comes out. At this point, a coherent and complete business contribution to the economy can be understood.

Today, Econintersect analyzed advance retail sales for January 2020. This is final data from the Census Bureau for December 2019 for manufacturing, wholesale, and retail (see graphs below):

Business Sales - Unadjusted - $ millions

Many analysts pay particular attention to inventories in this report. Inventories are expressed as a ratio to sales. The current situation suggests the economy was contracting as inventories are growing.

Seasonally Adjusted Business Inventories Year-over-Year Change - Inventory Value (blue line, left axis) and Inventory-to-Sales Ratio (red line, right axis)

The takeaway from the above graph is that the overall inventory rate of growth is now decreasing. The above graph is the headline view of inventories. Econintersect uses unadjusted data to look at inventories. The graph below shows the growth or contraction of the inventory-to-sales ratio year-over-year. When the graph below is above zero, inventories are building faster than sales.

Unadjusted Inventory-to-Sales Year-over-Year Change

Caveats On Business Sales

This data release is based on more complete data than the individual releases of retail sales, wholesale sales, and manufacturing sales. Backward revisions are slight - and it is unusual that the revisions would cause a different interpretation of trend analysis.

The data in this series is not inflation-adjusted by the Census Bureau - Econintersect adjusts using the appropriate BLS price indices relative to the three data series.

  • CPI less shelter for retail sales
  • PPI subindex OMFG for manufacturing
  • PPI subindex PCUAWHLTRAWHLTR for wholesale sales

As in most US Census reports, Econintersect questions the seasonal adjustment methodology used and provides an alternate analysis. The issue is that the exceptionally large recession and the subsequent economic roller coaster has caused data distortions that become exaggerated when the seasonal adjustment methodology uses more than one year's data. Further, Econintersect believes there is a New Normal seasonality and using data prior to the end of the recession for seasonal analysis could provide the wrong conclusion.

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