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Business Inventories Look Good In April 2012

Written by Steven Hansen

Business sales rate of growth improved marginally, but the good news is that inventories showed little growth. Business data combines manufacturing, wholesale and retail sales.

  • The data this month was historically reset due to the new data baselines.
  • There were no signs of inventory buildup.

US Census Headlines:

  • sales up 0.2% month-over-month, up 5.4% year-over-year
  • inventories up 0.4% month-over-month (up 6.0% year-over-year), sales-to-inventory ratios were up from 1.25 one year ago – and are now 1.26.
  • market expected inventories to be up 0.2% (actual 0.4%) [note: the unadjusted inventories did rise only 0.2%]

Econintersect Analysis:

  • sales up 0.2% month-over-month, and up 4.9% year-over-year
  • sales (inflation adjusted) up 1.8% month-over-month, up 3,4% year-over-year
  • retail inventories up 0.1% month-over-month (up 5.6% year-over-year), sales-to-inventory ratios 1.37 which is historically low for this month of the year (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.

Today (analysis), Econintersect analyzed advance retail sales for May 2012. That is early data for the month after the data for this post. This is final data from the Census Bureau for April 2012 for:

  • Manufacturing new orders up 1.1% month-over-month, and up 3.2% year-over-year
  • Manufacturing new orders (inflation adjusted) up 2.8% month-over-month, up 0.8% year-over-year
  • Manufacturing unfilled orders down 0.6% month-over-month, and up 9.3% year-over-year
  • sales up 2.9% month-over-month, and up 6.8% year-over-year
  • sales (inflation adjusted) up 7.0% year-over-year (note: according to the BLS, the price inflation in the wholesale trade PPI sub-index is -0.2% in April 2012.  This sector is deflating)
  • inventories contracted 0.2% month-over-month, sales-to-inventory ratio is 1.17 which is low for Aprils (good: inventories are not growing).
  • sales down 3.1% month-over-month, and up 4.6% year-over-year
  • sales (inflation adjusted) down 2.7% month-over-month, up 1.6% 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 April, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,249.6 billion, up 0.2 percent (±0.2%)* from March 2012 and up 5.4 percent (±0.4%) from April 2011.

Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,575.1 billion, up 0.4 percent (±0.1%) from March 2012 and up 6.0 percent (±0.4%) from April 2011.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of April was 1.26. The April 2011 ratio was 1.25.

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

This is the ninth straight month of record current dollar business sales.

Inflation adjusted business sales have been quite noisy with no clear short term trend – long term the growth has been less good since the beginning of 2011.

Using inflation adjustments, analysts can more clearly count the quantity of business transactions. Inflation adjusted data shows there are currently no signs of recession – But again the growth rate trend line has been deteriorating since the beginning of 2011.

Many analysts pay particular attention to inventories in this report. Inventories, expressed as a ratio to sales, remain well within the historical levels for past Aprils. A unusual rise in this ratio would suggest the economy was contracting.   However, because recession is on everyone’s mind, we are zeroing in on retail inventories.

Retail inventories rose only slightly in April, and the inventory to sales ratio (unadjusted) is 1.37 is low historically for Aprils.

Please note that Econintersect uses unadjusted data to evaluate this ratio, and sees a rise in this ratio (versus the Census “decline”) – but overall the ratio should be considered normal.

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 guesses that outsourcing and moving imported products through wholesalers are creating “artificial” growth. The approximate year-over-year growth rates:

  • manufacturing up about 11% (5% inflation adjusted)
  • wholesale up about 11% (7% inflation adjusted)
  • retail up about 6% (2% 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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