January 2015 Business Inventories and Sales Very Weak. Sales in Contraction, Inventory-to-Sales Ratio Bad.

Written by Steven Hansen

Econintersect‘s analysis of final business sales data (retail plus wholesale plus manufacturing) shows unadjusted sales significantly declined compared to the previous month, and this sector of the economy is in contraction. US Census agrees BUT as this series is moderately noisy – the real metric is the 3 month rolling averages – and that metric continues to decelerate and now is now barely in expansion and is below the range seen in the last 18 months. Unadjusted inventories are falling but the inventory-to-sales ratios are now at recessionary levels.

Econintersect Analysis:

• unadjusted sales rate of growth decelerated 5.2% month-over-month, and down 2.2% year-over-year
• unadjusted sales (inflation adjusted) down 0.9% year-over-year
• unadjusted sales three month rolling average compared to the rolling average 1 year ago decelerated 1.8% month-over-month, and is up 0.4% year-over-year.

Unadjusted Business Sales – Unadjusted (blue line), Unadjusted but Inflation Adjusted (red line), and 3 month rolling Average (yellow line)

• unadjusted business inventories growth decelerated 0.6% month-over-month (up 3.3% year-over-year with the three month rolling averages decelerating), and the inventory-to-sales ratio is 1.47 which is at recessionary levels (well above average for Januarys).

US Census Headlines:

• seasonally adjusted sales down 2.0% month-over-month, down 0.3% year-over-year
• seasonally adjusted inventories were unchanged month-over-month (up 3.4% year-over-year), inventory-to-sales ratios were up from 1.30 one year ago – and are now 1.35.
• market expectations were for inventory growth of -0.7% to +0.3% (consensus 0.1%) versus the actual of 0.0%.

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 February 2015. This is final data from the Census Bureau for January 2015 for manufacturing, wholesale, and retail (see graphs below):

Year-over-Year Change Manufacturing New Orders – Unadjusted (blue line) and Inflation Adjusted (red line)

Year-over-Year Change Wholesale Sales – Unadjusted (blue line) and Inflation Adjusted (red line)

Year-over-Year Change – Unadjusted Retail Sales (blue line) and Inflation Adjusted Retail Sales (red line)

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

Business Sales – Unadjusted – $ millions

This is a record current dollar month for sales for Decembers.

Year-over-Year Change Business Sales – Unadjusted (blue line) and Inflation Adjusted (red line)

Using inflation adjustments, analysts can more clearly count the quantity of business transactions. Inflation adjusted data accelerated.

Many analysts pay particular attention to inventories in this report. Inventories, expressed as a ratio to sales, remain well within the historical levels. A unusual rise in this ratio would suggest the economy was contracting.

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 overall inventories rate of growth is slowing – BUT sales are slowing faster. 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 a 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 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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