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Update on the Wholesale Industry

November 22, 2019

Is your business feeling the pressure of slowing growth in the wholesale industry? Tune in to this week's TrendsTalk to learn where this industry is headed.

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ITR Economics Divider


Transcript by Rev

Connor Lokar:
Hello everyone. I'm Connor Lokar, an economist on the team here at ITR Economics. I'm thrilled that you're here joining me for my latest TrendsTalk. Now, today's talk is going to be a nod towards the wholesale and distribution portion of the economy with you walking with a data nugget that you can track in your business that I bet will be a value to you in the future.

Now, I'll start by establishing and perhaps informing some of you that wholesale activity on both the durable and non-durable goods sectors of the US economy are firmly on the backside of the business cycle. They're on what we call Phase C, the slowing growth phase of the business cycle. In other words, deceleration. Still inching forward but at a much slower pace and that we were growing at a year ago. Wholesale trade of durable goods in the 12 months through September is up 1.9% compared to the same period a year ago and slowing down and now that compares to an 8.2% growth rate at this exact time last year. On the non-durable side, similar story. Things are up 1.4% for the last 12 months as a whole, but that compares not very well against a 7.3% growth clip again at this time last year, so it's a different world and a different phase of the cycle here in late 2019.

Now, these are both published by the US Census Bureau. You can track them there for bench-marking purposes or we publish them in our Trends Report with Forecast so you can keep an eye on them in that report each month. Those of you with a Trends Reports subscription, you know that we see activity in both of these sectors stalling out from a growth standpoint into the middle of 2020 when they will find their respective business cycle lows. So, unfortunately, one of the most common responses deep in a Phase C trend like this and teetering on a Phase D recessionary trend is this is short term, it's a blip, the economy doesn't matter to my business, yada, yada, yada. But if you are feeling the pressure of these slowing sales and your inventory level is creeping higher, I assure you it's going to get a little bit worse during the next couple of quarters before it gets better.

Now, fortunately, the US Census Bureau publishes a nifty metric that you can and should keep an eye on and that is wholesale ratios, specifically the wholesale inventory to sales ratio. Now, this ratio, for total and that is durable and non-durable goods, on a 12-month moving average basis is right at 1.35 and rising. Now typically, a rising metric would be a positive indication. Up is good, right? Well, wrong in this case anyway. The inventory to sales ratio is what we call at ITR an inverse indicator, meaning that the rising trend is actually taken as a negative signal. So that inventory to sales ratio actually represents the balance between the value of inventory at the end of each month in monthly sales so that raw numbers indicating the number of months of inventory on hand based on sales for the month. So the current national average ratio of 1.35 indicates that wholesalers across the country have enough product on hand to cover about one and one-third month's worth of sales. And as that's rising, that rising ratio is actually indicative of swelling inventory, slowing sales, likely a combination of the two.

Now, what is really incredible about this is when we leverage the rates of change of this ratio, we see it correlate very well on an inverse basis to wholesale trade of durable goods. For an example, a lead time of five months. And now, that downward trajectory we see from those rates of change indicates that the growth in wholesale activity on the durable side of the economy is going to suffer during the next two quarters or so. So in a general sense, this rising national ratio suggesting, to those of you that are feeling this slowdown, that it's time to regain control of your unruly and rising inventory and keep an eye on your cash flow and your aging receivables.

But I don't want to mistake generic tactics for strategy. You need to know what your internal markers are and your external leading indicators are that you and your management team need to see in order to act. Now, these wholesale ratios, in my opinion, make an excellent place to start. They break down from not just a total. You can look at the non-durable and durable sectors or individual sectors like the wholesale ratio for electrical and electronic goods, for example. And again, you can find these published by the US Census Bureau or we can show you them if you run your business through our DataCast program and you can see how you correlate and measure up against these metrics and see what they are saying for you.

Thank you for joining me. I'm Connor Lokar.


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