December 2011 Business Sales & Inventories Very Soft

Business sales continued to show moderate growth in December 2011 – but are strangely soft. Business sales combines manufacturing, wholesale and retail sales.

Business sales (inflation adjusted) now has the worst growth rate since February 2010 confirming this softness. Inventories look good with inventory-to-sales levels near historical lows for Decembers.

As inventories only rose slightly, Econintersect suspects business anticipated a weaker Christmas season – and cut back offerings accordingly.   Interestingly, advance January 2012 retail sales also came in soft today.     

US Census Headlines:

  • sales up 0.7% month-over-month, up 8.9% year-over-year
  • inventories up 0.4% month-over-month (up 7.7% year-over-year), sales-to-inventory ratios up were 1.28 one year ago – and are now 1.26.
  • market expected inventories to be up 0.4% to 0.5% (actual 0.4%)

Econintersect Analysis:

  • sales down 2.2% month-over-month, and up 7.2% year-over-year
  • sales (inflation adjusted) down 2.0% month-over-month, up 3.2% year-over-year
  • inventories down 0.7% month-over-month (up 7.6% year-over-year), sales-to-inventory ratios 1.31 which is on the low side of the historical channel for this month of the year (good: as high inventories are an recession signal).

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 doesn’t really 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.

Yesterday (analysis), Econintersect analyzed the disappointing advance retail sales for January 2012. That is early data for the month after the data for this post. This is final data from the Census Bureau for December 2011 for:

  • Manufacturing new orders down 1.3% month-over-month, and up 10.5% year-over-year
  • Manufacturing new orders (inflation adjusted) down 0.3% month-over-month, up 4.8% year-over-year
  • sales down 1.8% month-over-month, and up 9.0% year-over-year
  • sales (inflation adjusted) down 3.0% month-over-month, up 6.8% year-over-year
  • inventories up 0.9% month-over-month, sales-to-inventory ratios 1.17 which is at the low end of the historical channel for this month of the year (good: inventories are not growing).
  • sales down 0.9% month-over-month, and up 6.2% year-over-year
  • sales (inflation adjusted) down 0.9% month-over-month, up 2.0% year-over-year

The headlines:

Sales. The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for December, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,230.0 billion, up 0.7 percent (±0.3%) from November 2011 and up 8.9 percent (±0.4%) from December 2010.

Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,555.5 billion, up 0.4 percent (±0.2%) from November 2011 and up 7.7
percent (±0.4%) from December 2010.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of December was 1.26. The December 2010 ratio was 1.28.

Please see caveats at the end of this post on the differences between Econintersect data analysis methodology and US Census.

Comparing the light blue bars (2010) with the dark green bars (2011), there was noticeable “less good” business sales ratio in December when compared to the previous months.  Translation:  December business sales improved but the improvement was not as good as previous months.

Inflation adjusted business sales had remained in a channel between 4% and 8% year-over-year growth between April 2011 and November 2011 – now in December the year-over-year improvement is only 3.3%, and the lowest improvement year-over-year since February 2010.

Using inflation adjustments, analysts can more clearly count the quantity of business transactions.  Although, inflation adjusted data shows there are currently no signs of recession – the USA is definitely seeing a softening of growth in December.

Many analysts pay particular attention to inventories in this report. Inventories, expressed as a ratio to sales, contracted slightly and remain well within the historical levels for past Augusts. A unusual rise in this ratio would suggest the economy was contracting. As stated earlier, inventory-to-sales ratios are average compared to other Octobers.

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 a trend analysis.

The wholesale sales portion of this index is showing remarkable year-over-year increases – and is outperforming all other economic benchmarks. The question is why? Econintersect‘s guess is that outsourcing and moving imported products through wholesalers is creating “artificial” growth. The approximate year-over-year growth rates:

  • manufacturing up about 10% (3% inflation adjusted)
  • wholesale up about 11% (10% inflation adjusted)
  • retail up about 7% (3% inflation adjusted)

Can the growth in wholesale sales be considered real growth when even the employment levels in this industry remain below pre-recession highs – or that real (inflation adjusted) manufacturing and retail sales growth are only one-third of wholesale?

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 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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