U.S. Businesses Shed Inventories at a Rapid Rate

Reduced inventory accumulation has played a large role in the current downturn in economic activity. Business inventories dropped 1.1% m/m during January and the decline marked the fifth consecutive reduction. Over just the last three months inventories have fallen at a 14.1% annual rate, a record for the series which dates back to 1980.

The inventory correction is in response to the downturn in total business sales (not to mention the weakness in pricing). Sales fell 1.0% during January and they were down at a 34.0% annual rate over the last three months. Manufacturers, wholesalers and retailers have suffered with retail sales down at a 15.8% rate during the three months ended January. Wholesalers' sales dropped at a 43.4% rate, though that was inflated by the decline in oil prices. Factory shipments dropped at a 37.8% rate.

Retailers' inventories cratered 1.7% during January, not much different from the December drop. Emphasizing how little inventories are wanted, the three-month rate of decline soared to an 18.2% annual rate, a record. As might be expected, the motor vehicle sector has shed lots of unsold vehicles from inventory. They're down at a 31.2% rate since the fall. But it's outside the auto sector where the inventory decumulation has been notable. Nonauto retail inventories fell 0.5% in January and at a record 11.8% annual rate during the last three months. Furniture inventories have been dropped at a 28.8% annual rate during the last three months while there's been a 13.7% rate of inventory reduction amongst general merchandise retailers. Rounding out the picture is a 7.7% rate of decline amongst apparel sellers. These inventory cuts went some distance in reducing the level of retail inventories relative to sales, but at 1.55 the ratio was still quite elevated versus the lows of 1.45 last year.

Wholesale inventories dropped 0.7% during January but the decline left them still up 1.0% from last year. To figure whether there still is much of a correction yet to go in this sector it's best to take a look at what is happening excluding petroleum. The pipeline inventory swings can be dramatic and thus distort the overall picture. Indeed, the figures less oil indicate that a correction of inventories has begun at the wholesale level. Nonoil wholesale inventories dropped 1.1% during January for the fifth consecutive monthly decline. The 11.9% rate of decline over the last three months is striking and a record.

Factory inventories, reported last week, fell sharply again. The 0.8% monthly decline was the fifth in a row.

Input and output inventory dynamics from the Federal Reserve Bank of San Francisco is available here.