Business Inventories Rise in July As Sales slowed to slowest growth since last winter at +0.5% MoM

Slowing sales pushed up business inventories twice as fast as expected in July. Business inventories rose +1.1% MoM (consensus +.5%, prior revised up to +.8% from +.7%). Sales rose at their slowest pace since last February, rising by +.5% MoM in July versus +1.7% MoM in June. The inventory-to-sales ratio rose marginally to 1.24 from 1.23, but remains very low historically. Over the past year, business inventories have risen +6.4% YoY while sales have risen an even faster +10.6% YoY.

The slowdown in sales and rise in inventories will probably cause businesses to slow growth in order to keep stockpiles lean as the economy weakens. The 1.1% increase in the value of unsold goods was the largest in four years.

Auto inventories lead the inventory gains in July, rising by +3.2% MoM (+0.8% YoY). This was the largest monthly gain in auto inventories in more than two years. Remember that auto sales hit a 15-year low this summer, so much of this increase was probably unintended, or tied to the parts strike that ended in July. Excluding autos, retail inventories rose +.8% MoM (+2.3% YoY). Stockpiles at furniture stores also rose a strong +1.3% MoM, as sales fell -.2% MoM.

Among the three major categories, retail inventories, which accounts for about a third of the total, rose +1.5% MoM (+1.8% YoY), followed by wholesale inventories (29% of total) rising by +1.4% MoM (+10.6% YoY), while manufacturing inventories (37% of total) grew much more slowly in July at +0.5% MoM (+7.6% YoY).

Among the three major categories, manufacturing sales rose +2.1% MoM (+8.8% YoY), while wholesalers and retail firms saw sales drop. Slower consumer spending caused retail sales to fall -0.6% MoM (+1.9% YoY), sales at wholesalers fell -0.3% MoM (+16.5% YoY).

Inventories versus sales remain highest at retailers, at 1.48, and lowest at wholesalers at 1.07. Businesses have done an exceptionally good job keeping inventories lean this year, which means there are no large inventory overhangs to work through.

In the second quarter, companies trimmed inventories by almost $50B, the biggest drop in over six years since the last recession. This subtracted almost 1.5% from GDP growth. Rising inventories are likely to boost GDP growth in the third quarter, which is unlikely to persist as companies remain very proactive in containing undesired inventory accumulation. It is important to remember that part of the gain in inventories is due to higher prices.