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Economy in Brief

U.S. Business Inventories Fall in May as Sales Outweigh Production
by Gerald D. Cohen  July 16, 2020

• Business inventories down 2.3% in May; fifth consecutive monthly decline.

• Sales jump 8.4%, but still 12.5% below January peak.

• Inventory-to-Sales ratio decreases to a still elevated 1.51.

Total business inventories dropped 2.3% in May (-4.8% year-on-year) after decreasing a downwardly-revised 1.4% in April (was -1.3%). This is the fifth consecutive monthly decline in inventories. Total business sales jumped 8.4% (-11.8% y/y) after plummeting an unrevised 14.4% in April. This leaves sales 12.5% below their January peak. The inventory-to-sales (I/S) ratio dropped to 1.51 from its 17-year high of 1.67 (unrevised).

Manufacturing output as well as imports -- neither of which are reported in this release -- drive a wedge between inventories and sales. Despite 3.8% growth in May, factory production was down 17.2% from its December 2019 peak. Business inventory swings can have a meaningful impact on GDP. In the first quarter inventories subtracted 1.56 percentage point to GDP growth. In the second quarter any inventory swings will be overwhelmed by shifts in the final sales components such as consumption and investment.

Retail inventories fell 6.2% in May (-9.6% y/y). Auto inventories, which comprise roughly 30% of retail inventories, dropped 14.9% (-21.4% y/y). Non-auto retail inventories contracted 1.6% (-3.0% y/y). General merchandise inventories, the second largest sector declined 0.4% (-6.4% y/y). The troubled department store sector -- a subset of general merchandise -- saw inventories decrease 1.9% (-11.3% y/y). Factory sector inventories gained 0.2% (-0.7% y/y). As reported last week, wholesale inventories were down 1.2% (-4.2% y/y).

Retail sales increased an upwardly-revised 17.2% in May (was 16.8%) and -1.1% y/y, with non-auto sales growing 10.2% (-1.3% y/y). However, these followed substantial drops in March and April. Note: the advanced retail sales data for June was released today showing a 6.5% gain (5.0% y/y). Wholesale sector sales grew 5.4% in May (-16.2% y/y), while shipments from the factory sector were up 3.1% (-17.0% y/y).

The inventory-to-sales ratio in the retail sector fell to 1.35, its lowest level in eight years. The non-auto I/S ratio dropped to 1.20 roughly where it was prior to COVID-19. The wholesale and factory sector I/S ratios declined to still-elevated 1.53 and 1.65 respectively.

The manufacturing and trade and industrial production data are in Haver's USECON database. Detailed industrial production data can be found in the IP database.

Manufacturing & Trade May Apr Mar May Y/Y 2019 2018 2017
Business Inventories (% chg) -2.3 -1.4 -0.3 -4.8 1.9 4.9 3.2
  Retail -6.2 -3.8 1.1 -9.6 1.0 4.6 2.4
    Retail excl. Motor Vehicles -1.6 -1.2 -0.8 -3.0 1.9 3.7 2.2
  Merchant Wholesalers -1.2 0.2 -1.1 -4.2 1.7 6.5 3.0
  Manufacturing 0.2 -0.5 -1.1 -0.7 2.8 3.6 4.2
Business Sales (% chg)
Total 8.4 -14.4 -5.2 -11.8 1.6 5.9 5.3
  Retail 17.1 -12.7 -5.1 -1.1 3.4 4.2 4.6
    Retail excl. Motor Vehicle 10.2 -12.8 1.0 -1.3 3.3 5.1 4.9
  Merchant Wholesalers 5.4 -16.4 -5.1 -16.2 0.6 6.8 6.7
  Manufacturing 3.1 -14.0 -5.5 -17.0 1.0 6.6 4.7
I/S Ratio
Total 1.51 1.67 1.45 1.40 1.39 1.36 1.38
  Retail 1.35 1.68 1.53 1.47 1.46 1.46 1.48
    Retail excl. Motor Vehicles 1.20 1.35 1.19 1.23 1.22 1.22 1.24
  Merchant Wholesalers 1.53 1.63 1.36 1.34 1.34 1.28 1.30
  Manufacturing 1.65 1.70 1.46 1.38 1.38 1.35 1.38
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