February Wholesale Sales and Inventories Reported Down, Real Inventories Up

The February report on Wholesale Trade, Sales and Inventories (pdf) from the Census Bureau estimated that the seasonally adjusted value of wholesale sales was at $427.6 billion, down 0.2 percent (+/-0.5%) from the revised January level, and 3.1% percent (+/-1.2%) lower than wholesale sales of February 2015.  The January preliminary estimate was revised down $0.8 billion or 0.2 percent, leaving January's sales 1.9% below the December level.   February wholesale sales of durable goods were up 1.2 percent (+/-0.7%) from January and were down 3.4 percent (+/-1.8%) from a year earlier, with a 3.1% increase in wholesale sales of electrical and electronic goods leading the increase for the month, while wholesale sales of machinery fell 1.4%..  Wholesale sales of nondurable goods were down 1.6 percent (+/-0.7%) from January and were down 6.2 percent (+/-1.9%) from last February, with wholesale sales petroleum and petroleum products down 10.1% on lower prices.   As an intermediate activity, wholesale sales are not included in GDP except insofar as they are a trade service, since the traded goods themselves do not represent an increase in the output of the goods sold.

On the other hand, the monthly change in private inventories is a major factor in GDP, as additional goods on the shelf represent goods that were produced but not sold, and this February report estimated that wholesale inventories were valued at a seasonally adjusted $583.3 billion at month end, a decrease of 0.5 percent (+/-0.4%) from the revised January level but 0.6 percent (+/-1.4%)* higher than February a year ago, with the January preliminary estimate revised downward $2.1 billion or almost 0.4%, and with the January change revised from 0.3% growth to a 0.2% contraction.  Inventories of durable goods were down 0.1 percent (+/-0.4%)* from January and were down 1.3 percent (+/-1.4%)* from a year earlier, with inventories of lumber and other construction materials down 1.6% on lower prices, while inventories of electrical and electronic goods were up 2.0% on lower sales.  At the same time, the value of wholesale inventories of nondurable goods was down 1.1 percent (+/-0.4%) from January, but was up 3.7 percent (+/-1.9%) from last February, as the value of inventories of raw farm products fell 4.2% while wholesale inventories of drugs and drug store sundries fell 3.5%..

As you know, to approximate the effect of the change in wholesale inventories, valued here in current dollars, to the change in GDP, we must first convert these dollar figures into an approximation of the change in the quantity of goods that were inventoried.  The BEA does that by deflating the value of each of the categories of inventories with the appropriate sub-index from the producer price index for the same month.  However, since inventories are notoriously difficult to estimate without knowing the month that each subset of the total was inventoried, and since the BEA does not break out wholesale inventories from other business inventories in the GDP report, all we have to go on is the monthly wholesale data for the 4th quarter.  Thus we'll just attempt a rough estimation by referring to the aggregate producer price index for February, which also includes January's price changes, and adjust nominal inventories with them for each month.  In February, producer prices for finished goods fell 0.6%, largely on a 3.4% decrease in wholesale energy prices, after January's producer prices for finished goods fell 0.7% on a 5.0% drop in wholesale energy prices.  That suggests that the January change in real wholesale inventories was an increase by about 0.5%, after which February real wholesale inventories rose by around 0.1%.    That would mean real wholesale inventories at the end of February were about 0.6% higher than they were at the end of the 4th quarter.  Our records and prior estimates of the change in wholesale inventories over the 4th quarter was a real increase of about 0.5%.  Since the GDP calculation looks at the change in the growth of inventories, that suggests that wholesale inventories at the end of February appear to be an incremental addition to 1st quarter GDP.

Note that our estimate of an small increase in real inventories in the first quarter appears to differ from the assessment of the Atlanta Fed, who’s GDP now algorithm changed their forecast for the contribution of inventory investment to first-quarter real GDP growth from –0.4 percentage points to –0.7 percentage points after the release of this wholesale trade report.  We don't necessarily disagree with the Atlanta Fed’s take, because they certainly had to revise their previous forecast lower on the large January revision.  The revision to January with this report changed that month’s nominal wholesale inventories from 0.3% growth to a 0.2% contraction.  That in effect cut the January growth in real inventories in half, from roughly 1.0% to 0.5%.  We assume Atlanta Fed’s prior -0.4 percentage point estimated subtraction from GDP from inventories had indicated higher wholesale inventories were more than offset by lower factory & retail inventories.  After this report, wholesale inventories wont be doing much offsetting of any lower inventories elsewhere.

(Note: the above was excerpted from my weekly coverage at Marketwatch 666)

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