Tuesday, August 9, 2016

Wholesale sales and inventories point to renewed growth

 - by New Deal democrat

While we'll get a more complete picture on Friday, this morning's release of wholesale sales and inventories supplies yet more evidence that the shallow industrial recession bottomed in March.  

Without doubt, the inventory to sales ratio has been the most Doomish statistic of this past year. All of the usual suspects pointed to this as surefire proof that the economy was falling into a full-fledged recession.  But as I've pointed out for months, the inventory to sales ratio tends to make a peak in about mid-slowdown or recession, and declines as the economy is exiting the downturn.  So here is what the wholesale inventory to sales ratio looks like through June:

It has failed to make a new high in months, and today's data showed an unambiguous decline.

Of import, note that this ratio also increased going into slowdowns such as the 1998 Asian currency crisis, not just during full-fledged recessions.

As I have also continually pointed out, the sequence is that sales turn up before inventories do.  That's what is shown by decomposing the ratio into sales (red, left scale) and inventories (blue, right scale):

In a recession, the ratio primarily decreases via a sharp decline in inventories, whereas in slowdowns like 1998 the ratio primarily decreases via a renewed increase in sales -- which is what we have seen this year.

I'll have more to say Friday when we get retail and whole business sales and inventories.