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Economy in Brief

U.S. Business Inventories Starting to Back Up
by Tom Moeller March 19, 2008

The Commerce Department reported that for January total business inventories rose 0.8% after an upwardly revised 0.7% rise in December. The annualized three month growth in inventories rose as a result to 7.7%, its strongest since mid-2006. The quicker rate of accumulation, if sustained, would reverse much of the -1.4 percentage point contribution inventories made to 4Q07 growth in real GDP.

A quicker rate of accumulation of factory inventories accounts for much of the acceleration. In January they surged by 1.3% after a strong 0.9% December increase. Together they raised the three month rate of accumulation to 12.0%, up from 7.2% during 4Q07. Higher oil prices were behind some of that faster rate of gain as petroleum inventories rose 8.1% in January (29.7% y/y). Nevertheless, excluding petroleum factory inventories still increased a firm 0.8% during January, the same as in the prior month, and the three month rate of accumulation rose to 8.8%, up from the 5.9% 4Q rate of gain and from the 1.7% 3Q rise.

Retail inventories are up, but the rate of gain shows a less pronounced acceleration due to auto cutbacks. During January total retail inventories rose 0.4% after no change in December. The three month rate of increase was a minimal 0.7% after a 0.2% 4Q rise. Inventories of motor vehicle & parts rose just 0.4% in January after four consecutive months of decline. As a result motor vehicle inventories during the last three months fell at a 4.8% rate after an 8.0% 4Q drop. Motor vehicle inventories were reduced as production was cut back. Outside of autos retail inventories were well behaved through January and rose just 0.4%, half the December rise. That lowered the three month growth rate to 3.3% from 4.3% during 4Q.

The industry detail in the retail sector shows that building materials inventories grew at a 6.4% rate over the last three months versus a 7.6% 4Q gain. Furniture inventories fell at a 5.7% rate after a 2.3% 4Q rise. At clothing & accessory stores the three month rate of accumulation of 0.4% offset a 0.3% rate of decumulation during 4Q. General merchandise stores' inventories rose at a 0.8% rate over the last three months following decumulation at a 1.7% rate during 4Q.

The gains in wholesale inventories have been strong, rising 0.8% in January after a 1.1% December rise. Curiously, the value of inventories of petroleum products fell 3.4% in January and offset half of the prior month's increase. Less petroleum wholesale inventories rose a strong 1.0% and the three month rate of increase nearly doubled to 10.5% versus 4Q. During the last ten years there has been a 59% correlation between the annual change in wholesale inventories less petroleum and the change in merchandise imports.

Business sales rose 1.5% and three month growth was still a firm 9.4% as of January. Much of that strength was due to wholesale sales which grew at a 17.7% rate over the three months. Petroleum industry sales grew at a 76.2% rate but less petroleum wholesale sales still were strong and grew at a 10.7% rate over the last three months.

As of January, strength in sales offset the gain in inventories and the I/S ratio fell to 1.25%, the lowest since 2005.

Inventories, Lumpy Trade, and Large Devaluations from the Federal Reserve Bank of Philadelphia can be found here.

Business Inventories January December Y/Y 2007 2006 2005
Total 0.8% 0.7% 4.8% 4.1% 5.8% 6.2%
  Retail 0.4% 0.0% 3.3% 3.0% 3.2% 2.8%
    Retail excl. Auto 0.4% 0.8% 3.8% 3.3% 4.5% 4.5%
  Wholesale 0.8% 1.1% 6.4% 6.1% 8.5% 7.4%
  Manufacturing 1.3% 0.9% 5.0% 3.7% 6.4% 8.9%
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