Wholesale Inventories Growing as Sales Shrink

A sharp drop in sales caused a larger inventory build than expected in December of +1.1% MoM (consensus +.3%). This was the largest monthly jump in inventories in a year and a half. In addition, November's figure was revised higher to +.8% from +.6% originally. Over the past year, inventory levels have expanded by +6.1% YoY. Sales fell -.7% MoM, the largest decline in almost a year. Steep declines were seen in auto sales (-2.2% MoM, -8.1% YoY). and computers (-4% MoM). Overall, durable goods sales fell -2% MoM (+1.6% YoY) and non-durable goods sales rose +.4% MoM (+19.3% YoY). Auto inventories grew a substantial +3.5% MoM, following a +2.6% gain the prior month, and the largest monthly increase since April 2006. Over the past year, auto inventories are up +5% YoY. The only category seeing a decline in inventories was computers (-1.2% MoM, +2.7% YoY). Non-durable goods inventories rose +1.6% MoM (+13.6% YoY). Non-durables include food and drugs. Stockpiles of oil rose +9.2% MoM. The inventory to sales ratio rose to 1.09 months, which is not far above the recent low of 1.07 months in November. The durable goods I/S ratio rose the most, to 1.48 months. Excess inventories indicate that demand is declining, and production will need to slow down to accommodate reduced consumption. This data is likely to slightly boost 4th quarter 2007 GDP estimates, and further reduce 1st quarter 2008 GDP forecasts. Manufacturing ISM, factory orders, and industrial production are all likely to weaken this winter.