Are Wholesale Inventory Levels Foretelling Recessionary Stall?

The sales data released on wholesale trade told of MoM improvement of 0.4% in September 2010.  The headlines:

The U.S. Census Bureau announced today that September 2010 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading – day differences but not for price changes,were $353.9 billion, up 0.4 percent (+/-1.1%) from the revised August level and were up 11.9 percent (+/-1.6%) from the September 2009 level.  The August preliminary estimate was virtually unchanged from last month.  September sales of durable goods were up 0.2 percent (+/-0.7%) from last month and were up 13.3 percent (+/-1.9%) from a year ago.  Sales of metals and minerals, except petroleum, were up 2.7 percent from last month, while sales of hardware, plumbing and heating equipment and supplies were down 2.1 percent. Sales of nondurable goods were up 0.6 percent (+/-1.6%) from last month and were up 10.6 percent (+/-1.8%) from last year.  Sales of farm product raw materials were up 5.9 percent from last month and sales of paper and paper products were up 1.5 percent.

Econintersect uses unadjusted data to analyze as seasonal adjustment factors are suspect due to the distortions of a deep recession and New Normal data characteristics – and how this plays into the quantitative methodologies used in seasonal adjustments.  In this case, if we ignore the data from 2009 –  sales fall at least slightly  from August to September (and in 2010 the unadjusted data was literally the same).

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However, the following chart included in the press release begged for additional analysis:

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The concern is the sharp rise in the inventory to sales ratios.  One of the warning markers for a recession is a rise in this ratio as it indicates sales are not keeping up with the expected demand.  Inventory costs money, and no wholesaler will intentionally hold more inventory than necessary.  Econintersect was hoping the problem was seasonal adjustment factors.

By using unadjusted data, you can clearly see from the chart below – a very consistent YoY inventory levels for September.

Click on graphs for larger images.

Finally, taking another look at the data graphically – the current inventory to sales ratios remain in the lower part of the historical range.

Click on graphs for larger images.

Interpretations of the US Census inventory to sales ratios are complicated by unclear seasonal adjustment methodologies.

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