Another Negative for Fourth-Quarter GDP
The rising inventory/sales ratio is not a good sign.
THE SHARPER DETERIORATION in economic activity toward the end of the third-quarter that we had warned about was clearly evident in this week's big economics calendar.
This was especially true in the manufacturing sector where, after a respite from reports in the previous week, the news was especially heavy and disquieting. The temporary impact of the Boeing strike and hurricane effects definitely made data much worse, but the impact from the credit disruptions was also a major factor.
Weaker housing starts and a new plunge in homebuilder confidence highlighted a weak housing sector and a continued troubled consumer-spending environment was confirmed by larger-than-expected declines in retail sales and consumer sentiment. The only good news of the week was the relatively tame inflation September numbers for both producer and consumer prices with their falling food and energy costs promising some relief for consumers ahead.
As expected, the Fed's Beige Book survey results for September and early October among the 12 Fed districts was decidedly more downbeat, with weakness broader than ever among all districts in terms of weaker momentum in consumer spending, overall nonfinancial business investment and employment. The impact of tighter lending and overall credit market disruptions was also evident. Likely impacted by credit conditions, business has been reducing capital spending plans in almost every district and will be reflected in third- and fourth-quarter GDP reports.
The manufacturing downturns in both the New York and Philadelphia regions have been particularly severe. Residential real estate activity is still weak and has been joined more recently by falling commercial realestate construction in some regions. Not surprisingly, the financial industry is under pressure with negative effects in districts like New York.
The full inventory data for August have now been released with total inventories up 0.3% in August, less than the 0.5% consensus increase. The previously reported inventories at the manufacturing (up 0.6%) and wholesale (up 0.8%) levels were closer to expectations, although weaker-than-anticipated sales growth raised the inventory/sales ratio for both manufacturers (1.26 versus 1.21) and wholesalers (1.10 versus 1.08). Retailer inventories, the last piece of the August data, fell 0.6% (mostly due to a 1.6% drop in retail auto inventories) with the inventory/sales ratio remaining stable at 1.48 months.
Total business sales in August fell 1.8% with the biggest decline in manufacturing. The total inventory/sales ratio rose to 1.27 months from 1.24 in July. There is another month to go before we have the full third-quarter picture for inventories. Although it looks like they can still be a positive contributor to the third-quarter GDP growth, the rising inventory/sales ratio indicates they could be an additional negative for already weaker fourth-quarter GDP.
--Alexander P. Paris, CFA
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