Inventory: The Invisible Anchor On The US Economy

When it comes to the U.S. economy, fall 2015 by the numbers has been less than totally inspiring.

Gross Domestic Product, the sum of all goods and services produced in the U.S., rose at a 1.5 percent annualized rate. That is a very sharp drop off from Q2’s performance of 3.9 percent growth.

Consumer spending, according to Commerce Department figures, failed to reach analyst estimates for September. Total purchases inched up just 0.1 percent, short of the 0.4 percent increase in August. Economists polled by Bloomberg were calling for a median rise of 0.2 percent for September.

“There was a definite loss of momentum as we were coming out of the third quarter, but don’t worry too seriously about that,” said Scott Brown, chief economist at Raymond James Financial, Inc. “The job growth is positive, but we’ll need to see better wage growth down the line.”

Except, according to the U.S. Department of Labor, that “down the line” wage growth is not showing up. According to September 2015’s Employment Cost Index labor costs, the total cost to employers of wages, salaries and benefits rose 2 percent over the past 12 months, which is in line with post Great Recession growth that Chad Stone, chief economist for the Center on Budget and Policy Priorities think tank, described as “anemic.

Add to that list the retail sales figures the Commerce Department released in October, which showed more alarming signs of slumping spending. Retail sales were up only 0.1 percent in September, while August sales were revised down to show no growth, as opposed to the slim 0.2 percent increase initially reported. Core retail — which includes retails sales minus automobiles, gasoline, building materials and food services — dropped by 0.1 percent in September, after a downwardly revised 0.2 percent gain in August.

“It suggests that consumers are beginning to tighten their purse strings,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

Probably not what retailers wants to hear heading into the holiday spending season.

Still, despite some of the gloomy stats, commerce watchers are predicting moderately strong growth this holiday season. The NRF is predicting retail sales to increase 3.7 percent to a total of $630.5 billion through November and December, well above the 10-year 2.5 percent average.

So why the optimism? Is there more to those rather disspiriting figures than meets the eye — or has magical thinking officially begun to ring in the holiday season?

While we can never totally eliminate the latter, it seems this year there may be reason to give the former some credence this year, because it looks like there is really a spoiler in the mix.


The Inventory Anchor

Said as simply as possible, retailers rapidly clearing out inventory amassed at a somewhat greater rate in the previous few months is thought by many to have exerted an unusual amount of drag on the economy. Inventories increased by more than $100 billion in each of the last two quarters, a record back-to-back — a rise that has been ruled as unsustainable by industry watchers in the past, and drawing down that inventory in Q3 had a big effect.

“The story on inventories is that it’s a big adjustment that occurred quickly, and should be far less of a drag” in the next few quarters, Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, said before the report.

According to Reuters, businesses accumulated $56.8 billion worth of inventory in the third quarter, the smallest since the first quarter of 2014 and down sharply from $113.5 billion in the April-June period. Declines were seen across manufacturing, wholesale and retail inventories.

Because inventory gains were so weak in Q3, analysts speaking to Bloomberg estimate they subtracted 1.4 percentage points from growth. That is the largest drag since 2012, according to the commerce department. Subtracting out inventory and trade (which is affected by a weak dollar, and adds to inventory backlog) GDP grew 2.9 percent in Q3.

And that growth, many analysts pointed out, is being pushed by consumer spending that is actually looking fairly stable — if not overwhelming.  

According to the Q3 report, household purchases, which represent about 70 percent of the U.S. economy, were up 3.2 percent. Personal consumption was up 22 percent, with consumer spending over three months up 3.6 percent.

“The headline is not indicative of how solidly the U.S. is growing,” said Gennadiy Goldberg, U.S. rates strategist in New York with TD Securities. “The domestic drivers in consumption are quite strong.”

A Prettier Picture For The Holidays

The growth figures are not the only numbers that may be a bit better than they appear on first pass, as there is some reason to believe that the stronger than average consumer spending is being helped a bit by wage growth that might also be somewhat stronger than those Commerce Department estimates.

The ADPthe payroll processor for about 24 million American employees, estimates that wage growth for employees in the same job for at least 12 months was up 3.5 percent in the third quarter — as opposed to the Labor Department’s 2 percent for the general labor force.

We think (ADP) is more accurate,” said Sophia Koropeckyj, an economist for Moody’s Analytics, according to USA Today. “There’s a pickup in growth but it’s being masked.”

The proof will be in the (figgy) pudding as it were. If consumer spending really is stronger than it seems — and if Americans are operating with a little more money in their accounts (and less going in at the pump), then that solid growth some have predicted might just come true.

We’ll watch, and let you know.