Rising wholesale inventories a sign of slowing demand

Somewhat of a mixed bag of news from the Commerce Department  today. Wholesale inventories jumped 1.3% in July.  On the one hand rising inventories will translate into higher GDP in the short term; however, increased inventories at a time when the economy has slowed could cap growth later in the year if businesses ease up on production.

Sales did rebound following a 0.5% decline in June, rising 0.6% in July.  The inventories-to-sales ratio, which looks at how many months it would take for businesses to liquidate their stockpiles at the current sales pace, inched up from 1.15 to 1.16.



Some comfort comes from the fact that very sharp and painful cutbacks in production in 2009 have eliminated excess and unwanted inventories  following the near collapse in demand in late 2008.

Although the economy has hit a bump during the summer, goods on hand are very near historical lows.  If economic activity is just in a temporary pause, and that is probably the most likely scenario in my view, July’s jump in inventories should not be viewed as a worrisome event.

If inventory growth continues to outpace sales, we are more likely to see a more pronounced slowdown in manufacturing.