Reuters details:

Marketwatch details:

The U.S. manufacturing sector expanded for an eighth straight month in March, boosted by stronger orders and production, the Institute for Supply Management reported Thursday.

The ISM manufacturing diffusion index rose to 59.6% in March from 56.5% in February, the ISM said. It was the highest reading since July 2004.

Higher numbers indicate more firms are growing.

Economists surveyed by MarketWatch were looking for the index to strengthen to 57.5%. Seventeen of 18 industries were growing in March, the private industry group said.

Diving deeper into the details, we see an important shift in inventories as companies are stating they are actually building inventories. The below chart details respondents stating they were building, shedding, or maintaining inventory levels.

WSJ reports:

U.S. wholesalers' inventories unexpectedly fell 0.2% in January, the Commerce Department said Wednesday, as surging demand pulled goods off shelves in the first month of the year.

Wall Street analysts had expected inventories to rise by 0.2% in January. The unexpected decline followed a downward revision in December's inventory level showing December inventories contracted by 1.0%, rather than the 0.8% drop originally reported.

Sales by U.S. wholesalers in the first month of 2010 were up 1.3% to a seasonally adjusted $346.7 billion, the latest data showed. It was the tenth straight monthly increase in sales, according to the Commerce Department. Sales were particularly strong for cars and groceries.

The decline in inventories appears to be good news for the U.S. economy. A pileup in inventories doesn't always bode well for future production or for future economic growth, and a decline may indicate that demand is outpacing supply.

The amount of wholesale goods on hand relative to sales was 1.10 in January, a record low. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio in December was 1.12.

If one were to believe these figures, then on the margin this is likely a detractor for Q4 GDP and Q1 GDP (a decline in inventory means less was actually produced to meet end-user demand - I am just not convinced actual inventories declined for real in January, just as I didn't believe they actually jumped back in November). Either way, the jump in end-user demand is good news (as long as it is real and not nominal... not sure how to figure out the flows though).

Wholesale Sales



Wholesale Inventories



The question is when will businesses not only slow the trend of a decline in inventory levels, but actually build? If end-user demand continues to show its head, we may FINALLY be getting there (though there is likely plenty of excess capacity ready to meet this demand before it flows through to hiring and capex spending).

Source: Census

Reuters reports on the "surprise":

We've been waiting (and waiting) for the "mother of all inventory corrections" to provide a boost to the economy (EconomPic reported that there was no inventory correction in September). Upon reading the initial releases it seemed like this trend finally reversed course in October for the wholesale sector. Per the WSJ:

Inventories of U.S. wholesalers unexpectedly increased in October, breaking a string of 13 declines and suggesting production will pick up.

Wholesale inventories rose 0.3%, the Commerce Department said Wednesday. The mild increase came even with strong demand, indicating optimism among distributors over the economic recovery.

Sales of U.S. wholesalers climbed in October by 1.2% to a seasonally adjusted $326.17 billion, the seventh straight increase.

The 0.3% increase in inventories was the first since a 0.7% rise in August 2008. Economists surveyed by Dow Jones Newswires expected a 0.6% drop in October wholesale inventories.

In looking at the data, it seems there was an increase, though that increase in dollar terms was extremely concentrated in farm products and petroleum (without farm products inventories were actually negative).



Of more importance is that the increase in inventory isn't "real" (literally or figuratively). The chart below shows the percent change in each inventory category. So why isn't this real? Well, during the month of October the price of both petroleum and livestock spiked (as an example the price of crude oil was up in more than 12% October, while the price of lean hogs was up more than 15%), both more than the inventory increase of each.



In other words the actual level of the drivers of this report (farm products and oil) may actually be lower and it is this "real" level that feeds into GDP.

Source: Census

Forbes reported yesterday (traveling again all week so expects delays):

Total business inventories continued to fall in September by 0.4%, less than the 0.7% decline economists were expecting, the Commerce Department reported today. September now marks the thirteenth consecutive month of inventory declines, the longest streak since the 15 months ending April 2002. Total business inventories are 13.4% lower compared to August 2008.

Total business sales fell 0.3% in the month, breaking the three-month streak of growth. The decline can be attributed to a 2.6% decrease in retail sales, reflecting a 14.3% decline in auto sales. All other major types of retail stores experienced sales gains of less than 1% except for building material stores whose sales decreased by 0.6%. Manufacturing sales and wholesale sale rose 0.85 and 0.6% respectively.

Marketwatch explains how inventory correction works its way through to final output figures:

Once businesses reduce their inventories to desired levels, any increase in sales will have to come from new production, which would boost both U.S. jobs growth and imports.

The inventories report typically receives little attention from investors, but the pace of inventory reduction will be at the heart of any economic recovery this year. Most economists believe inventories will continue to be cut for several quarters before general restocking is needed.

But unfortunately, the trend of a continued declining inventory to sales ratio was not in the cards for September.



While this is only one data point, without sales growing faster than inventories, we won't get the mother of all inventory corrections many (I included) expect.

Source: Census

Marketwatch details:

Paced by a large draw-down in autos, business inventories fell 1.5%, matching the largest percentage decline ever recorded in the 17-year history of the data. Inventories also fell 1.5% in December 2008 and in October 2001.

It was the 12th consecutive month of falling inventories. Read the full report.

Economists surveyed by MarketWatch were expecting a 1% drop in inventories. See Economic Calendar.

Meanwhile, sales increased 1% in August, which were also boosted by the government's cash-for-clunkers deal. The figures are not adjusted for price changes, but are adjusted for seasonal variations.

Inflation-adjusted business sales are one of four key indicators used to determine if the economy is in recession or expansion. The others are nonfarm payrolls, personal incomes, and industrial production

The good news is this sets up the "Mother of All Inventory Corrections" we've all been waiting for, but when? Well, inventories are at late 2005 levels (good for the inventory correction story), but sales are at early 2005 levels (not good for the inventory correction story).



My guess is that inventories continued to decline in September, but at some point the rebound (or even flattening in sales) will require a replenishment of inventories.

Source: Census

Bloomberg details:

Peter Boockvar (via the Big Picture) takes a look at yesterday's wholesale inventory release (been traveling, thus the reason for the late posts):

June Wholesale Inventories, which make up about 25% of Business Inventories, fell a greater than expected 1.7% vs a forecasted drop of .9% and May was revised down by .4% to show a decline of 1.2%. The greater than expected fall IF followed by a similar drop in Business Inventories, will lead to a revision downward in Q2 GDP as the inventory drag would be more than expected.

Back to Peter:

Because sales rose .4%, the inventory to sales ratio fell to 1.26, the lowest since Oct ‘08 when it was at 1.21. While the inventory is somewhat old news, it gives us a snapshot of how the quarter ended and further quantifies the extent of the inventory contraction. It also should follow that the greater than expected drag in Q2 should lead to much less of one in Q3. Business Inventories are out on Thursday.

Don't fret green shoot worshippers. Any Q2 downward revision (Q2 is SOOOO.... last week) means upside potential for the Q3 rebound.

Source: Census

Yesterday we saw another monthly decline in business inventories. Xinhuanet with the details:

Inventories held by U.S. businesses on shelves and backlots fell 1.3 percent in February, marking the sixth straight monthly decline, the Commerce Department reported Tuesday.

The 1.3 percent drop in business inventories matched the January decline and close to the 1.2 percent fall that economists had expected.

The sixth consecutive decline is the longest stretch since the country's businesses cut their stockpiles for 15 straight months ending in April 2002, a period that covered the last recession.

The February drop in inventories came as businesses' sales edged up by 0.2 percent, rebounding from a 1.2 percent decline in January.

Source: Census

Some more positive data came out yesterday I initially missed. While it may be counterintuitive at first to think a drop in inventories is a positive thing for future economic growth, when inventory needs to be replaced, production that was sitting on the sidelines is put back to work. Forbes reports:

Business inventories fell 1.1% in January, more than the consensus 1.0% decline and the fifth consecutive monthly drop, the Commerce Department reported today.

Inventories were down in all major sectors in January. Manufacturing inventories fell 0.8%, wholesale inventories fell 0.7%, and retail inventories dropped 1.7%, the largest decline since November. Within retail, auto dealer inventories fell by 4.4%, the largest drop since July 2005.

The retail sales number that came out with the inventory data is one month behind the retail sales data Commerce put out earlier today. Commerce's earlier release revised January retail sales up to a 1.8% increase, the largest gain in three years.

Source: Census

LA Times reports:

Inventories at U.S. businesses fell more than forecast in December and the most since 2001 as companies responded to slumping sales that reflect a deepening recession.

The 1.3 percent drop in the value of unsold goods at factories, retailers and wholesalers followed a revised 1.1 percent decline in the prior month, the Commerce Department said today in Washington. Sales fell 3.2 percent after a 5.7 percent decline in November.

So while inventories are shrinking at a rapid pace, sales are falling even faster.

Looking over a longer time frame (year over year, rather than month over month) we see sales that have plummeted and inventories at almost exactly the same level. Awfully bearish for expectations of production growth going forward.



Source: Census

Forbes details the latest Inventory / Retails Sales figures:

The Good:

Business inventories fell 0.7% in November, a bit more than the consensus 0.5% decline and the largest drop since November 2001. IFR was expecting a 0.8% drop.

Inventories were down in all major sectors but fell 1.3% among retailers, the biggest drop since July 2005. Auto dealer inventories fell 1.7%, so total retail inventories excluding auto dealers fell 1.0%, lower than the overall retail inventory drop but still a record.

The Bad:

November business sales fell a record 5.1%, and are down 8.9% from November 2007. The prior record was October's 3.9% decline.

What it Means:

As sales are falling faster than inventories, the current level of inventory on hand is increasing relative to sales. In fact this measure increased almost 17.5% from a year ago. This means there is less need for a businesses to reorder (there is already plenty in their inventory), which means new orders, although already awful, are likely to get worse going forward.



Source: Census

Although inventories are in some cases down year to year, the 'Inventory to Sales' ratio has increased rather dramatically in recent months across retail outlets.



What does this mean for the economy? Nothing good... while consumption has been down in recent months, production facilities have been running, which is good for the economy. Pretty soon those inventory orders will not need to be replenished, putting another strain on the economy.

Source: Census