Sunday, February 15, 2015

January retail sales; gauging the impact of December inventories on 4th quarter GDP revisions

it was a fairly light week for economic reports, but there was a widespread misinterpretation of December inventory data by the media we'll discuss today...the key release this past week was on retail sales for January from the Census Bureau; in addition, there were also two Census reports on inventories: December wholesale trade and December business inventories, giving us an early look at what impact that the change in inventories might have on fourth quarter GDP, which were only estimated when the BEA reported on GDP two weeks ago...this week also saw the import and export price index for January and the Job Openings and Labor Turnover Survey (JOLTS) for December from the Bureau of Labor Statistics...

Retail Sales Fall 0.8% on Drop in Gasoline Prices

retail sales started the new year down, but the drop in sales was due to lower gasoline prices...specifically, the Advance Retail Sales Report for January (pdf) from the Census Bureau estimated that our total seasonally adjusted retail and food services sales were at $439.8 billion in January, which was a decrease of 0.8% (±0.5%) from the December sales of $443.3 billion, but 3.3 percent (±0.9%) above sales in January of last year...December's sales were revised up by less than 0.1%, from $442.9 billion, but the reported percentage decline from November remained unchanged at 0.9% lower; nonetheless, the revision to 4th quarter GDP will likely be minimal...estimated unadjusted sales in January, extrapolated from surveys of a small sampling of retailers, indicated sales fell almost 21% to $399,338 million, from $506,062 million in December, and were up 2.8% from the $388,279 million of sales in January a year ago, so once again the seasonal adjustments were a major factor in this report...although this report appears weak on first perusal, we wont be able to tell if this is a real decline in goods sold until we get the consumer price data next week...

once again we'll include the table of monthly and yearly percentage changes in sales by business type taken from the Census pdf.....the first double column below gives us the seasonally adjusted percentage change in sales for each type of retail business type from December to January in the first sub-column, and then the year over year percentage change for those businesses since last January in the 2nd column; the second pair of columns gives us the revision of last month’s October advance monthly estimates (now called "preliminary") as revised in this report, likewise for each business type, with the November to December change under "Nov 2014 revised" and the revised December 2013 to December 2014 percentage change in the last column shown...for reference, here is what those December percentage changes looked like before this month's revision....   

January 2015 retail sales 

from the above table we can see that January sales at gas stations were down 9.3% to $38,952 million, and as they accounted for 8.8% of total retail sales, retail sales excluding gas station sales were nearly stagnant, falling less than 0.1%...sales at motor vehicle and parts dealers, which account for more than 20% of this report, contributed to the January sales decrease, as they fell 0.5% to $90,778 million, leaving retail sales excluding the automotive group down 0.9%; take out car dealers and gasoline, and sales were up 0.2%...from the first column, we can see that the other businesses showing weakness in January were the specialty stores, such as sporting goods, book and music stores, which saw their seasonally adjusted sales fall 2.6% to $7,460 million, clothing stores, where sales fell 0.8% to $21,435 million, and furniture stores, where sales fell 0.7% to $8,656 million...meanwhile, miscellaneous store retailers saw January sales rise 2.6% to $10,213 million, and sales at bars and restaurants rose 0.8% to $50,067....however, since we don't know the direction or magnitude of the price changes in the goods sold, we cannot guess how this report will impact 1st quarter output, but it’s fair to say we can be reasonably sure that it will likely be lower than the 4th quarter, because nominal seasonally adjusted sales in January were somewhat lower than those of both October and November....

again, since the overall revision to December retail sales was less than 0.1%, this report will have scant impact on 4th quarter GDP revisions...however, within the business types, there were some notable revisions to the original advance report from December (percentage change table shown here) with this release (shown in 3rd column above)...the largest revision was in sales at miscellaneous stores, which were reportedly down 1.9%, and have now been revised to show sales up 0.6%...other business types seeing upward revisions included building material and garden supply centers, originally shown with a 1.9% decrease in sales, which has now been revised to a decrease of 0.7%, and for restaurants and bars, where sales were originally reported up 0.8%, which are now revised to show December sales 1.4% higher...meanwhile, sales at gas stations, first reported down 6.5%, are now shown to have seen sales fall 7.4%, while December sales at clothing stores were revised from a decrease of 0.3% to a drop of 1.2%, and sales at specialty stores, such as sporting goods and bookstores, were revised from a decrease of 0.2% to a drop of a full one percent...

Potential Impact of December Inventories on 4th Quarter GDP Revisions

the other two reports we'll look at this week were on December sales and inventories for different sectors of the economy...here's a simplistic way to think about how these reports affect GDP: if the economy consumes 10 apples at a dollar a piece in November, and 11 apples at 90 cents each in December, sales have gone down by 1% in December but monthly GDP is up 10%…if there are 10 apples on the shelf in both months, reported inventories will go down 10% in December, but the inventory contribution to GDP will stay the same…with that in mind, let's look at what was reported..  

the first release on inventories we saw this week was the Wholesale Trade, Sales and Inventories Report for December (pdf) from the Census Bureau, which estimated that seasonally adjusted sales of wholesale merchants fell 0.4 percent (+/-0.9%)* to $454.6 billion from the revised November estimate of $451.7 billion, but were up 1.4 percent (+/-0.9%) from December a year earlier...the November preliminary sales estimate was revised down by $0.6 billion or 0.1%, and hence was 0.4% lower than October...wholesale sales of durable goods were up 1.1 percent (+/-1.4%)* over November and were up 7.3 percent (+/-1.8%) from December a year ago, as wholesale sales of construction materials rose 5.4%, wholesale sales of electrical equipment rose 3.4% while wholesale computer equipment sales fell 2.1% from November...seasonally adjusted sales of nondurable goods were down own 1.7 percent (+/-1.1%) from November and down 3.5 percent (+/-1.9%) from last December, as wholesale sales of petroleum and petroleum products fell by 13.7%, largely due to lower prices...excluding oil sales, sales of non durable goods rose 2.1% in December, as wholesale drug sales rose 4.8% and miscellaneous wholesales sales rose 4.6%....note that the asterisks indicate that Census does not yet have sufficient statistical evidence to determine whether sales actually rose of fell for the periods indicated....

this release also reported that seasonally adjusted wholesale inventories were valued at $547.6 billion at the end of December, 0.1% (+/-0.4%)* higher than the revised November level and 6.7% (+/-0.9%) above last December's level, while November's preliminary inventory estimate was revised up by $0.1 billion, statistically insignificant...wholesale durable goods inventories were up 0.2 percent (+/-0.5%)*  from November and up 7.8 percent (+/-1.4%) from a year earlier, with wholesale inventories of computers, peripherals and software up 2.6% while while inventories of electrical equipment and appliances fell 1.7%....inventories of nondurable goods were down 0.1 percent (+/-0.4%)* from November while they were up 4.9% (+/-1.2%) from last December, as wholesale inventories of chemicals were up by 3.4% while wholesale inventories of petroleum and petroleum products were down by 6.2%...again, excluding inventories of petroleum and petroleum products, wholesale non-durable inventories in December were 0.5% greater than those in November...in part due to the distortion caused by lower petroleum prices, the closely watched inventory to sales ratio of merchant wholesalers rose to 1.22, up from 1.21 in November and up from the inventory to sales ratio of 1.16 in December of last year, as the inventory to sales ratio for petroleum and petroleum products, which is about 10% of wholesale sales but just 3% of wholesale inventories, rose from 0.31 to 0.34...

then on Thursday, the Census Bureau released the composite Manufacturing and Trade Inventories and Sales report for December, which is  covered in the media as the "business inventories" report, and which estimated the combined value of seasonally adjusted distributive trade sales and manufacturers' shipments was at $1,331.2 billion in December, down 0.9% (±0.9%)* from November, while 0.9% (±0.4%) above the total monthly sales level of December of last year...manufacturers sales were estimated at $488,245 million, down 1.1%, while retailer's sales were estimated down 1.1% at $393,208 million and, as previously noted, sales of merchant wholesalers were down 0.4% and accounted for $454,587 million of the overall total....once again, most of the drop in business sales was associated with lower oil prices; even manufacturer's sales are more than 10% refinery sales, as we mentioned when we discussed December factory orders..

meanwhile, total manufacturer's and trade inventories were estimated to have increased 0.1 percent (±0.2%)* from November to a seasonally adjusted $1,764.4 billion at the end of December, which was up 3.9 percent (±0.5%) from December a year earlier...seasonally adjusted inventories of manufacturers were estimated to be valued 0.3% lower at $634,786 million, inventories of retailers were estimated to be valued at $562,881 million, a 0.1% increase, and inventories of wholesalers were estimated to be valued at $547,648 million at the end of December, up 0.1% from November...the month end total business inventories to total sales ratio, the metric which is widely watched to determine if inventories are becoming excessive, was at 1.33, up from 1.31 November and up from 1.29 December a year ago, again likely a distortion caused by record high petroleum inventories... 

both sales and inventories from this report were included in 4th quarter GDP, but December inventories were only estimated when the GDP report was released two weeks ago, when the BEA assumed that wholesale and retail inventories had increased and that nondurable manufacturing inventories had decreased for the month...in reporting on this report, most analysts assumed that this report indicated that the BEA overestimated inventories and hence marked down their estimates of GDP...for instance, economists polled by Reuters estimated that GDP could be lowered by at least 0.5%; Wells Fargo economists concurred; Macroadvisers estimated a total hit of 0.6% to GDP from a combination of December reports....however, it's likely that few of these estimates have adjusted inventories for inflation, a necessary prerequisite to determine their impact on GDP...we have little to go on; we can't tell from looking at the GDP report (pdf), as it only gives us the quarterly change in inventories, and that at an annual rate to boot, and it doesn't give a deflator for inventories...so we'll try to figure it out by walking through the steps the BEA itself would likely take in arriving at that result..

we'll start with wholesale inventories, which we have already noted were up just 0.1%, largely due to a 6.2% drop in petroleum inventories...most of the inventories covered by this report would be deflated by the BEA using the producer price index for December, which showed a 1.2% drop in prices for finished goods, along with a 1.7% drop in prices for intermediate goods and a 5.0% drop in prices for raw goods...however, most of that was as the result of lower energy prices, which fell 6.6% at the finished energy goods level...that alone would indicate a real increase in energy goods inventories, which was borne out anecdotally by news articles in December indicating seasonally record stocks....looking at foods, we see wholesale prices were down 0.4% for finished foods, down 0.8% for intermediate foods, and down 6.9% for raw foodstuffs....the wholesale inventories report indicates that inventories of wholesale groceries rose by 1.1%, while inventories of farm products rose by 0.8%; once adjusted for prices, BEA should find that real inventories of wholesale groceries rose by 1.5%, while real inventories of farm products may have risen by as much as 5.8%, and it's those real inventories that would be applied to GDP...meanwhile, wholesale prices less food and energy were up 0.2% for finished goods, down 0.6% for intermediate goods, and down 0.5% for raw goods...to determine real inventories for each of those goods, the BEA would use the corresponding itemized tables in the producer price report...prices for finished wholesale goods, for instance, are listed in table 4 under "Final demand goods less foods and energy"....by way of example, wholesale inventories of computer equipment were up 2.6% in December, while their prices were down 0.7%; that would suggest that an increase of 3.3% in real inventories of wholesale computers for December would be applied to 4th quarter GDP...

similarly, inventories of goods at retail would be deflated with the various components of the consumer price index for December, which showed a drop of 0.4%...again, energy prices were a major factor, but even excluding food and energy, prices for goods less food and energy were down 0.3%...but we dont have to pick through the CPI report to get the deflator for December, because the BEA has already computed it in their income and outlays report for December, which we looked at last week...the PCE price index was down 0.2%, already implying an increased adjustment to GDP...but to adjust retail inventories, we'd have to use the PCE price index for goods, which we find was down 1.0% in December, as is shown in Table 9 of the pdf version of that report...applying that to retail inventories, which are not broken down by category, we'd estimate that real retail inventories rose 1.1% in December, in keeping with or even more than the BEA estimate...

we would find the details on factory inventories in the the Census Bureau's Full Report on Manufacturers’ Shipments, Inventories, & Orders for Decmeber (pdf), but again they would be deflated with the appropriate price index for the types of inventories the various manufactures are accumulating...many of these price indexes would again be found in the producer prices report....inventories of non-durables, which were estimated in the advance GDP report, were down 1.5% in December, but again much of that was due to an 8.8% drop in refinery inventories, which make up 15% of non-durable factory inventories…other factory inventories which fell in December included textiles, rubber products, pesticides and industrial chemicals, all of which use petroleum as an input...indeed, checking the producer price index, we find prices for industrial chemicals were down 4.4% in December, indicating the 0.6% drop in inventories of chemicals wasn't a real drop at all, but actually a real increase of around 3.8%..other components of factory inventories are less clear; to figure inventories of capital goods, for instance, we might have to estimate using the GDP deflator for equipment, which showed an annualized price increase of 1.1% in the 4th quarter….that would mean about a 0.1% per month reduction from the 0.3% nominal increase to arrive at the change in real inventories of December capital goods...

all in all, it appears that the BEA estimates for 4th quarter GDP inventories were pretty close to on the mark, and that the estimates of economic forecasters that reduced inventories will cause a major writedown of  4th quarter GDP will prove to be unfounded...of course imports, which we discussed last week, is another matter...lower prices for those will just make their real subtraction from GDP that much larger...

(the above is the synopsis that accompanied my regular sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in receiving my weekly emailing of selected links, most from the aforementioned GGO posts, contact me…)

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