How's Business?

This is an excerpt from our Morning Briefing.

Every month, the Census Bureau releases its “Advance Monthly Sales for Retail and Food Services.” The latest report was released on June 15 at 8:30 a.m. An hour and a half later every month, the Census Bureau releases its “Manufacturing and Trade Inventories and Sales” report—for the previous month. In other words, on June 15, Census reported retail sales through May and business sales of goods through April. The retail sales report tends to get all the attention by the media and by economists because it is one month more current than the more comprehensive business sales report. But Debbie and I find that there is a wealth of useful information about the economy in the latter report.

What we see in the business sales report is increasing signs that inflation has been boosting the nominal value of these sales but weighing on their inflation-adjusted value. Real inventories are starting to rise relative to sales, especially among some retailers. These businesses are likely to respond to unintended inventory accumulation as they always do, i.e., by cutting prices to clear them. So the good news is that some of the economy’s inflationary pressures should abate. The bad news is that economic growth will suffer, increasing the risks of a typical goods-led recession.

Let’s examine the latest business sales and inventories data, both nominal (available through April) and real (through March).

(1) Business sales. Manufacturing and trade sales rose 13.8% y/y to a record-high $21.8 trillion (saar) during April (Fig. 1). However, real business sales was unchanged on a y/y basis over the three months through March (Fig. 2). That’s down from the post-lockdown high of 16.2% during May 2021. This growth rate in real business sales closely tracks the growth rate in real GDP of goods, which was up 4.5% y/y through Q1.

Here are the y/y growth rates in current dollars and inflation-adjusted dollars for the three major components of business sales through March: manufacturing shipments (13.9%, -2.7%), wholesale sales (22.3, 2.5), and retail sales (5.2, -7.0) (Fig. 3 and Fig. 4).

(2) Business inflation. The Census Bureau compiles price deflators for business sales and its components. The one for the aggregate measure of business sales rose by an astonishing 16.7% y/y through March, the highest since January 1975 (Fig. 5). Data available since 1968 show that this series tends to rise near the end of economic expansions and to fall during recessions. Here are the latest inflation rates through March and their readings a year ago for manufacturing (17.6%, 7.9%), wholesale sales (17.6, 10.4), and retail sales (12.2, 3.3) (Fig. 6). These are truly astonishing inflation rates.

(3) Business inventories. Manufacturing and trade inventories rose 15.1% y/y to a record high of $2.3 trillion through March (Fig. 7). Over this same period, real business inventories rose 2.0% to the highest level since March 2020. Here are the current-dollar and inflation-adjusted growth rates through March of the three major categories of business inventories: manufacturing (10.5%, -2.5%), wholesale (22.5, 9.3), and retail (12.3, 1.2) (Fig. 8 and Fig. 9).

Investors recently have fretted over unintended inventory pileups, especially in the major department stores. It’s hard to see much of a problem in the inflation-adjusted inventories-to-sales ratios for overall business or the three major components of the aggregate (Fig. 10 and Fig. 11). All four ratios have jumped during the first three months of this year but are within their normal ranges of recent years. However, the current-dollar ratio for general merchandise stores did make a large jump during April, to 1.58 from 1.19 a year ago (Fig. 12).

(4) Business cycle correlations. We have often observed that the y/y growth rate in business sales (in current dollars) closely tracks the growth rate in S&P 500 aggregate revenues (Fig. 13). The former rose 13.7% through April, while the latter was up 13.4% through Q1. The surge in the inflation rate over the past year has been fully reflected in S&P 500 revenues. Remarkably, S&P 500 earnings have kept pace with inflation too, suggesting that profit margins are holding up well in the face of rapidly rising costs.

Another strong business cycle correlation is the one between the growth rate of real business sales (on a y/y basis using the three-month average of the series) and the level of the M-PMI (Fig. 14). A similarly tight fit exists between the growth rate of real business sales and the level of the average of the general business indexes of the regional business surveys conducted by five of the 12 regional Federal Reserve Banks (Fig. 15).

May’s regional surveys confirmed that the goods sector of the economy has stopped growing. We expect that June’s surveys will do so as well. We expect that June’s M-PMI will fall close to 50.0 from May’s surprisingly robust 56.1.

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