Recession Alarm! Inventory Build at the Wholesale Level

By Markos Kaminis

The week offered up a worrisome economic data-point that was mostly brushed aside by the popular press, but was noted here. There was an alarming inventory build at the wholesale level, which could be indicative of an abrupt drop off of demand for goods. Given the recent deterioration seen and documented here in other data, this economic warning should not go unnoted or unnoticed.

The economic data schedule for Thursday produced the latest Wholesale Trade Report. In this report for the month of March, wholesale inventories rose 0.4%, matching economists’ expectations and bettering the 0.3% decline of the month before. The result would have been welcomed if not for one important bit of information, also found within the report.

To really understand this data, we must compare the change in inventory to the monthly change in wholesale sales. Unfortunately, wholesale sales fell 1.6% in March, which is negative in and of itself, unless influenced by high-ticket durable goods or price fluctuation.

A closer look at the data only caused me more concern, outside of auto industry activity. Ford (NYSE: F) and GM (NYSE: GM) can rest somewhat easy for now, as month-to-month auto sales growth of 1.7% exceeded auto inventory growth of 1.2% in March. Another good sign for housing and for companies like Pier 1 Imports (NYSE: PIR) and Ethan Allen (NYSE: ETH) came in furniture sales growth of 0.6% versus inventory growth of 0.2%.

Economists and those in the corporate sector should feel uneasy, though, given that professional equipment sales declined by 1.0% as inventory slipped just 0.3%. Perhaps there’s more for Apple (Nasdaq: AAPL), IBM (NYSE: IBM) and Dell (Nasdaq: DELL) shareholders to worry about as well, given that computer equipment sales fell 0.9%, and relative inventory also declined by 1.0%.

This data does not measure manufacturing, which I have been pointing to as a key concern of late. However, both hardware and machinery segments noted significant declines in sales even as inventory increased sharply. This is an area of concern, because it measures durable goods with long lead times from order to delivery, and if inventory is building without sales, it could reflect an abrupt drop in the demand for goods at the end market. Hardware sales fell 1.6% as inventory rose 2.1%, and machinery sales fell 1.5% as machinery inventory rose 1.2%. Metals sales also fell sharply in March, dropping 2.5%, as inventory edged up 0.3%. I believe this is a sign that recent issues at companies like Caterpillar (NYSE: CAT) probably extend more broadly to many other firms.

Considering that inventory continued to grow as sales fell, the inventory-to-sales ratio rose in unhealthy fashion to 1.21, from 1.19 in February. What was especially concerning to me, though, was that nondurable goods sales fell 2.5%, as inventory rose 0.1%. There was weakness in petroleum that could have been effective price affected, but there was also softness in paper and apparel, which might reflect important softness in consumer demand further down the channel.

Investors were not oblivious to the news, as the SPDR S&P 500 (NYSE: SPY) fell 0.4% and the SPDR Dow Jones Industrial Average (NYSE: DIA) declined 0.2%, but those moves were off of recent strength post the jobs report of last Friday; stocks were due for a break in my view. Remembering that employment remains a lagging indicator, and that a good deal of undocumented unemployment continues to plague our economy, we should be skeptical of recent euphoria and wary because economic issue is apparent. Find more of our value-added insights at our blog’s home page.

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