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A New Red Flag for Our Rosy Economic Scenario

February 11, 2015

A New Red Flag for Our Rosy Economic Scenario

Wholesale inventories balloon to Lehman-Moment levels.

A lot of economists, particularly those quoted in the media, claim that rising inventories are a sign of confidence, that merchants believe that the future is rosy, that sales will be good. There is some truth to that. Merchants stock up for expected good times. But when these hopes of good times turn into sales that are less than rosy, these inventories begin to pile up, and the ratio of inventories to sales suddenly takes a nasty turn.

Inventories tie up precious working capital, so companies manage them aggressively. But in the US, wholesale inventories have been ballooning since summer. And they now have become a red flag for the economy.

Part of the problem: hopes meet crummy sales. December sales by merchant wholesalers (except manufacturers), adjusted seasonally but not for price changes, fell 0.4% from November to $449.8 billion, the Census Bureau reported today. Year-over-year, they rose a mere 1.4%!

The good part: sales of durable goods jumped 7.3% from a year ago, with a number of big gainers, including electrical equipment up 13.4% and metals up 14.3%. But non-durable goods sales dropped 3.5% from a year ago. Wholesales of petroleum products, including gasoline, plunged 13.7% for the month and 29.4% from a year ago.

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