Business Inventories and Sales
Yesterday, the Census Bureau reported that business inventories in March increased by a seasonally adjusted 0.1 percent, while sales increased by 0.4 percent. Expectations for the former were for a 0.2 percent increase.
While this news may seem relatively benign compared to results in other indicators, the first quarter’s results in this area were disastrous.
Do the math with the numbers seen here. The seasonally adjusted sales table tells us that 1Q15 sales were:
- 1.3 percent below 1Q14
- 3.2 percent below 2Q14
- 4.0 percent below 3Q14
- 3.0 percent below 4Q14
Taking a look at the final comparison: That 3.0 percent decline represents a fall of $123 billion — in one quarter. That’s the equivalent of a $492 billion fall if annualized. Since the economy barely budged during the first quarter, 4Q14 and 1Q15 GDP were both $17.7 trillion, rounded. That first quarter decline in sales, if it gets fully reflected in GDP, would by itself portend a 2.8% (annualized) one-quarter decline in GDP.
This kind of decline will be (or maybe I should say “should be”) partially but far from entirely reflected in 1Q15, because many items sold in 1Q15 were partially or fully produced in prior quarters. What his clearly indicates is that there’s less need for what has been produced, and therefore that less needs to be produced going forward, unless underlying orders for goods and final sales increase pretty dramatically. The trouble is that production seems to have continued full-bore, causing inventories to be heavily bloated (33 percent higher than in March 2010, while GDP has grown by far less than half of that). March’s smaller-than-expected inventory increase may reflect the first recognition by producers that they can’t just keep making things and just assume that they’ll sell.
Barring a resurgence in sales similar to last year’s second and third quarters, a rebound which seems increasingly unlikely, it’s reasonable to predict that the chances of seeing flat to contracting GDP for the next couple of quarters are pretty high — or that it could get worse, meaning a larger number of contracting quarters and more severe contractions in each.
What happens when the demand for goods drops? Prices fall.
Even as job gains continue (insufficient, and with some hiccoughs, but still present), households are not seeing their overall incomes increase.
Median real household income, as reported by Sentier Research, has fallen during each of the past two months, and is still 4 percent below where it was in late 2007.
Basically, people don’t have much money to spend. Additionally, in many instances, they’re not spending what they might have because of pervasive economic uncertainty.
As seen in today’s Producer Price Index report (Table A), year-over-year “final demand” prices have been zero or negative during each of this year’s first four months — and the BLS itself acknowledges that falling gas prices only partially explain that. I believe that the declines represent the beginning of a period of slack demand which will last well into the rest of this year, if not longer.
This would give producers yet another reason to produce less, if they think that doing so might help them keep their prices firm and their profits acceptable. Their ability to successfully do that depends on the product and the number of direct/indirect competitors.
To the extent that producers cut back what they make in reaction to slack demand, they will of course negatively impact GDP growth.