Wholesale Inventories Rise More Than Expected as Sales Drop for First Time in Over 6 Months

Wholesale inventories, which account for about 25% of all business inventories, rose more than expected in July at +1.4% MoM (+10.6% YoY). Consensus had looked for only half the gain (+.7% MoM). A bright spot is that June’s wholesale inventory growth was revised down to +.9% from +1.1% previously. Durable goods inventories rose +1.6% MoM in July, the largest increase in over two years, while non-durables, which include food and energy, rose a slower +1.1% MoM. Inventories excluding petroleum rose +1.4% MoM and are up +9.9% YoY. The value of petroleum inventories rose +2.8% MoM in July, which was the peak in oil prices. Sales fell -.3% MoM, the first decline since February. This helped push the inventory to sales ratio up slightly to 1.07, but it still remains near its record low of 1.06 set last month. A year ago, the ratio was at 1.13. So, inventories may have gotten a little too lean earlier this year, but firms will be hesitant to let them rise too much in the current environment. All major categories of inventories rose in July, with autos rising +2.3% MoM (+13.5% YoY), and machinery rising +2.7% MoM (+9% YoY). This was the largest monthly increase in machinery in over ten years, and coincided with a 3.7% MoM drop in machinery sales, the largest monthly decline since the recession of 2001. The rise in wholesale auto inventories is understandable as sales reached a 15 year low in July. The rise in machinery inventories may indicate reduced demand due to slowing overseas growth and a strengthening dollar. The only categories to see a decline inventories in July were professional equipment, such as computers, and clothing. An increase in inventories will boost 3rd quarter GDP, but reduces growth prospects for the fourth quarter if they can’t be sold. Falling inventories subtracted -1.4% from 2nd quarter GDP growth.