U.S. wholesale stocks rise, seen hurting growth in 2016

WASHINGTON (Reuters) - U.S. wholesale inventories unexpectedly rose in January as sales tumbled, suggesting that efforts by businesses to reduce an inventory overhang could persist well into 2016 and restrain economic growth in the coming quarters.

New cars are seen on the showroom floor at the Medved dealer in Denver December 16, 2015. REUTERS/Rick Wilking

The Commerce Department said on Wednesday wholesale stocks increased 0.3 percent after being unchanged in December. Sales declined 1.3 percent, extending December’s 0.6 percent drop.

January’s weak sales pace means it would take wholesalers 1.35 months to clear shelves, the highest inventory-to-sales ratio since April 2009, when the economy was in recession.

“Plenty of inventory pain remains in the pipeline. Wholesale inventory growth has beaten sales growth since mid-2014 to leave a steep inventory-to-sales ratio spike that is usually only seen in recessions,” said Michael Englund, chief economist at Action Economics in Boulder, Colorado.

Inventories are a key component of gross domestic product change. They have been a drag on GDP growth since the third quarter of 2015.

But economists were little concerned that the high inventory-to-sales ratio signaled a recession, noting that the jump had been driven by a rise in the stocks of nondurable goods such as drugs, paper and farm products.

In addition, strong consumer spending and a firmer housing market, against the backdrop of a tightening labor market, are keeping the economy on steady ground.

“We take limited signal on the overall economy from such an outturn. That said, stronger inventory growth mechanically boosts current quarter GDP estimates,” said Jesse Hurwitz, an economist at Barclays in New York.

Government data last week showed businesses had made less progress than initially thought reducing the inventory bloat in the fourth quarter. Inventories subtracted just over one-tenth of a percentage point from fourth-quarter GDP growth.

Economists polled by Reuters had forecast inventories falling 0.2 percent in January. The component of wholesale inventories that goes into the calculation of GDP - wholesale stocks excluding autos - edged up 0.1 percent in January.

January’s surprise rise in wholesale inventory investment prompted economists to lift their first-quarter GDP growth estimates by as much as two-tenths of a percentage point to as high as a 2.4 percent annualized rate.

The faster growth will, however, come at the expense of output in the second and third quarters of 2016. The economy grew at a 1 percent rate in the fourth quarter.

Businesses accumulated record inventory in the first half of 2015, which outpaced demand. Though the pace of restocking slowed, inventories remained high in the second half of the year, posing a downside risk to 2016 GDP growth.

Wholesale drug inventories rose 3.3 percent in January, while sales slipped 0.2 percent. That left the inventory-to-sales ratio for that component at its highest since March 2005.

There were also increases in automobile inventories, which rose by the most since last June. With wholesale auto sales dipping 0.1 percent, the inventory-to-sales ratio hit its highest since May 2009.

Inventories also remained elevated at apparel, lumber, machinery and furniture wholesalers.

Reporting by Lucia Mutikani; Editing by Andrea Ricci and Alistair Bell