Surprise Inventory Build Threatens Fourth-Quarter Outlook

Source: http://www.flickr.com/photos/teegardin/

Source: http://www.flickr.com/photos/teegardin/

Sales from merchant wholesalers increased 1 percent on the month to $435.3 billion in October and are now up 6.4 percent on the year, according to the latest Monthly Wholesale Trade report, which was released by the U.S. Census Bureau on December 10.

Sales of durable goods were “virtually unchanged” on the month but are up 7.5 percent on the year. Sales of nondurable goods increased 1.8 percent on the month, buoyed by a 3.6 percent increase in the sale of petroleum and petroleum products, and are up 5.5 percent on the year.

Wholesale inventories increased 1.4 percent on the month to $514.1 billion, up 3.3 percent on the year. This is due to a 0.4 percent increase in durable goods inventories (motor vehicle parts are up 2.7 percent on the month; software and electrics inventories fell 5.7 percent) and a 3 percent increase in nondurable goods inventories. Inventories of farm product raw materials were up 17 percent on the month.

Although inventories climbed faster than sales, the inventory-to-sales ratio remained effectively unchanged at 1.18, up slightly from earlier in the third quarter and down from 1.22 in October 2012.

Economists and market participants can use the inventory-to-sales ratio to determine whether production will increase or decrease in the coming months. Production generally slows as inventories rise and firms need to work down the build, and production increases as inventory declines as firms work to avoid shortages.

Wholesale trade data can be useful to investors who want to gain some insight into consumer shopping behavior. Having an idea of whether production is likely to increase or decrease in the future — by looking at the inventory-to-sales ratio — investors can develop a better picture of the economic and business landscape against which they have to make decisions.

Corporate profits naturally increase when production increases (that is, when sales increase and inventories need to build to keep up). When inventories build faster than sales, though, this can foreshadow a slowdown in production.

Major U.S. equity markets edged lower on Tuesday following — but not necessarily as a result of — the news. Although inventories built more than expected, the markets appear to be focused on developments in fiscal and monetary policy.

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