Business Inventories Situation Nasty in June 2012

Written by Steven Hansen

The final business sales data (retail plus wholesale plus manufacturing) for June 2012 clearly turned ugly – barely growing year-over-year.

  • Hopefully next month’s data will improve if this morning’s retail sales are an indication.
  • There was a relatively huge inventory buildup in June which could imply (but not always) an impeding recession.
  • This analysis is worse than the headlines.

US Census Headlines:

  • sales down 1.1% month-over-month, up 3.0% year-over-year
  • inventories up 0.1% month-over-month (up 5.0% year-over-year), inventory-to-sales ratios were up from 1.26 one year ago – and are now 1.29.
  • market expected inventories to be up 0.2% (actual 0.1%)

Econintersect Analysis:

  • sales down 5.8% month-over-month, and up 1.5% year-over-year
  • sales (inflation adjusted) down 6.0% month-over-month, up 0.9% year-over-year
  • retail inventories down 0.3% month-over-month (up 5.0% year-over-year), inventory-to-sales ratios 1.24 which is historically very high (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, Econintersect analyzed advance retail sales for July 2012. That is early data for the month after the data for this post. This is final data from the Census Bureau for June 2012 for manufacturing, wholesale, and retail:

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

Year-over-Year Growth – Wholesale Sales – Unadjusted data (blue line) & Inflation Adjusted Data (red line)


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

The headlines:

Sales. The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for June, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,229.7 billion, down 1.1 percent (±0.2%) from May 2012 and up 3.0 percent (±0.4%) from June 2011.

Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,580.3 billion, up 0.1 percent (±0.1%)* from May 2012 and up 5.0 percent (±0.3%) from June 2011.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of June was 1.29.  The June 2011 ratio was 1.26.

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 the eleventh straight month of record current dollar business sales.

Inflation adjusted business sales have been quite noisy but this month’s data makes this series clearly in a downtrend.

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 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. A unusual rise in this ratio would suggest the economy was contracting.

Business Inventories Year-over-Year Change – Inventory Value (blue line) and Inventory-to-Sales Ratio (red line)

The takeaway from the above graph is that overall inventories growth is “less good”, but business sales are even more “less good” as the inventory-to-sales ratios have a slight growth bias. Admittedly, this is slight upward bias in the inventory-to-sales ratios is so slight that it is statistically insignificant.

The above graph is the headline view of inventories. Econintersect uses unadjusted data to look at inventories. To do so, you need to compare ONLY the data results in the month of the data release – and DO NOT compare one month against another. A low ratio is good if you are looking for recession evidence.

Unadjusted Inventory-to-Sales Ratio


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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