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Economy in Brief

U.S. Business Inventory Slide Halted in July
by Gerald D. Cohen  September 16, 2020

• Business inventories edged up 0.1% in July after six consecutive monthly declines.

• Sales jump 3.2%, but still 1.9% below January peak.

• Inventory-to-Sales ratio falls to six-year low.

Total business inventories ticked up 0.1% in July (-5.9% year-on-year) after falling an unrevised 1.1% in June. This is the first increase in seven months. Total business sales gained 3.2% (-1.2% y/y) following an 8.6% jump in June. This leaves sales 1.9% below their January peak. The inventory-to-sales (I/S) ratio fell to 1.33, a six-year low; in April the I/S ratio hit a 27-year high of 1.67. Manufacturing output as well as imports -- neither of which are reported in this release -- drive a wedge between inventories and sales. Factory production was up 3.9% in July, while goods imports jumped 12.3%.

Business inventory swings can have a meaningful impact on GDP. While inventories subtracted 3.46 percentage point to GDP growth in the second quarter, this was overwhelmed by shifts in the final sales components such as consumption and investment. We expect a similar situation in the third quarter.

Retail inventories increased 1.2% in July (-11.2% y/y). Auto inventories, which comprise roughly 30% of retail inventories, grew 2.7% (-25.2% y/y). Non-auto retail inventories gained 0.6% (-3.4% y/y). General merchandise inventories, the second largest retail sector was up 1.9% (-6.5% y/y). The troubled department store sector -- a subset of general merchandise -- saw inventories decrease 0.9% (-17.5% y/y). Wholesale and factory sector inventories declined 0.3% and 0.5% respectively (-5.6% and -1.0% y/y).

After a very strong May and June, retail sales growth slowed in the summer. Retail sales increased a downwardly-revised 0.5% in July (was 0.8%) and 5.5% y/y, with non-auto sales growing 1.0% (5.3% y/y). Note: the advanced retail sales data for August was released today showing a 0.1% gain (5.1% y/y). Wholesale sector sales and shipments from the factories both grew 4.6% in July (-4.0% and -4.4% y/y respectively).

The inventory-to-sales ratio in the retail sector edged up to 1.23 from last month's record low of 1.22 (data goes back to 1967). In April the retail I/S ratio hit a 26-year high of 1.68. The non-auto I/S ratio was unchanged at its record low of 1.12. The wholesale and factory sector I/S ratios declined to the more typical levels of 1.32 and 1.43 respectively.

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

Manufacturing & Trade Jul Jun May Jul Y/Y 2019 2018 2017
Business Inventories (% chg) 0.1 -1.1 -2.3 -5.9 1.9 4.9 3.2
  Retail 1.2 -2.7 -6.2 -11.2 1.0 4.6 2.4
    Retail excl. Motor Vehicles 0.6 -0.9 -1.6 -3.4 1.9 3.7 2.2
  Merchant Wholesalers -0.3 -1.3 -1.2 -5.6 1.7 6.5 3.0
  Manufacturing -0.5 0.5 0.2 -1.0 2.8 3.6 4.2
Business Sales (% chg)
Total 3.2 8.6 8.5 -1.2 1.6 5.9 5.3
  Retail 0.5 6.9 17.3 5.5 3.4 4.2 4.6
    Retail excl. Motor Vehicle 1.0 6.3 10.5 5.3 3.3 5.1 4.9
  Merchant Wholesalers 4.6 9.0 5.7 -4.0 0.6 6.8 6.7
  Manufacturing 4.6 10.0 3.0 -4.4 1.0 6.6 4.7
I/S Ratio
Total 1.33 1.37 1.50 1.39 1.39 1.36 1.38
  Retail 1.23 1.22 1.35 1.46 1.46 1.46 1.48
    Retail excl. Motor Vehicles 1.12 1.12 1.20 1.22 1.23 1.22 1.24
  Merchant Wholesalers 1.32 1.38 1.53 1.34 1.34 1.28 1.30
  Manufacturing 1.43 1.51 1.65 1.38 1.38 1.35 1.38
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