Will a Drop in Wholesale Inventories Hurt Q2 GDP Growth?

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The monthly release of wholesale trade inventories data rarely moves the markets, and it is reported with a one-month lag. Yet the April reading of wholesale inventories might actually have a negative impact on gross domestic product (GDP) in the second quarter.

April’s wholesale trade inventories were down by 0.5%, according to the U.S. Department of Commerce. This was worse than the −0.3% consensus estimate from Bloomberg. March’s inventory gain was originally reported as 0.2%, but that was revised lower to a gain of just 0.1%.

Sales of merchant wholesalers in April of 2017 were $462.3 billion, down by 0.4% from the revised March level. Still, this was up by some 7.3% from April of 2016.

While many other economic readings have been positive, they have indicated slowing growth trends that had been seen in the first two to three months of 2017. Some economists may view the sharp inventory drop as a sign of business caution, but it is hard to not interpret the negative number as a negative implication for second-quarter GDP.

In raw dollars, those inventories were $591.0 billion. While the figure is down 0.5% sequentially, investors and economists may note that this is up 1.6% from April of 2016.

There is also a key Inventories/Sales ratio for merchant wholesalers in April. That seasonally adjusted figure was down to 1.28 in April of 2017, compared with 1.35 in April of 2016.

The Commerce Department also gave a review of each segment in sales and inventories in April versus March. Inventories in automotive sales were down while sales were up. Furniture inventories were up but sales were down. Inventories of professional equipment were down but sales were up. Electrical inventories were down by just 0.1% while sales were up 0.7%. Machinery inventories were flat while sales were down.

There has yet to be an update to the Atlanta Fed’s GDPNow reading. The prior model forecast for seasonally adjusted real GDP growth in the second quarter of 2017 was 3.4% on June 2. Its prior forecast was 4.0% growth just on June 1.

As far as how the Commerce Department gets its estimates, questionnaires are mailed to employer firms selected in a probability sample of approximately 4,200 each month. Approximately 64.4% provided data for this reporting period, resulting in a total quantity response rate of 65.3% for sales and 66.2% for inventories.