The second-quarter numbers are in and, compared to the first quarter, they show slowing accumulation for inventories, which will hold down GDP, and they show no change for sales, which will hold down business confidence and, very likely, will not encourage businesses to add new employees. The data for June show a 0.1 percent rise for business inventories vs a 1.1 plunge for business sales which is the steepest drop in nearly 3-1/2 years. The unwanted mismatch between the change in inventories and the change in sales drives the inventory-to-sales ratio from 1.27 in May to 1.29 which is the highest reading in 2-1/2 years.
For the quarter as a whole, business inventories rose 1.2 percent vs the first quarter's sequential rise of 1.6 percent. Sales, again, are unchanged vs a 1.6 percent rise for first quarter sales. The stock-to-sales ratio for the second quarter is 1.27 vs 1.26 in the first quarter.
Components in June show a 0.1 percent inventory build for manufacturers, a 0.6 percent build of retailers and a 0.1 percent gain ex-auto, and a 0.2 draw for wholesalers. Together these numbers are modest and indicate that businesses are responding to weakness in demand, but the weakness in demand, at least in June, turned out to be severe. This morning's very strong jump for retail sales points to easing pressure on inventory managers who however are likely to be more hesitant than usual to add to inventories given not only this report but also the uncertain outlook for the global economy during the second half.
Market Consensus before announcement
Business inventories in May rose 0.3 percent, outpacing sales which fell 0.1 percent. The mismatch for May raised the stock-to-sales ratio one notch to 1.27 for the highest level since May last year. Importantly, the trouble was centered in the final demand component, that is retail sales where inventories surged 1.0 percent in the month against a 0.2 percent decline for sales.