Tags: Stockman | business | inventories | retail sales

Stockman: US Business Inventory Glut Is a Black Omen for the Economy

By    |   Thursday, 16 April 2015 07:00 AM

Business inventories in the U.S. are stacking up much faster than sales are, an omen of a violent liquidation to come that could mean a tumbling national economy, according to David Stockman, White House budget director during the Reagan era.

Stockman suggested investors should not be fooled by March retail sales that showed positive momentum, because that's only part of the overall business sales picture in America.

He explained it was not until four years after the recession officially ended that retail sales even got back to their pre-crisis peak. "Needless to say, when you spend 48 months digging out of a deep hole, it might look like progress if you ignore where you started," he writes in his Contra Corner blog.

More ominously, Stockman concludes there is "chilling evidence" that the supply side of the economy is not prospering.

In fact, he noted, total business sales (manufacturing, wholesale and retail) are continuing to falter even as inventories are expanding. Specifically, he cited February business sales of $1.313 trillion that were essentially flat with January, meaning that first quarter to date is down 2 percent from the fourth-quarter average and off 3 percent from the mid-year 2014 level.

Stockman predicted the spendthrift U.S. consumers who helped push the economy to lofty levels before 2008 are not going to make an encore appearance. "They have lost their ATM; they did not get a 'gas tax cut'; and the growth rate of real wages has ground decidedly slower," he said.

Stockman said a centerpiece of the 2008 financial crisis came when excessive inventories that built up during the housing boom were "violently liquidated."

In what he suggested could play out as an echo of that downturn, Stockman maintained the monthly rate of business sales in February was actually $16 billion less than the same month a year ago, while total inventories rose by nearly $60 billion.

"Why would corporate management be allowing inventory ratios to soar in the face of what has been the most tepid and inconstant recovery in modern times?" he asked.

"Can you say S&P 500? . . . The bullish inventory build, in effect, is the result of the drastically inflated stock quotes and options gains coming from the Wall Street casino."

"Needless to say, [Federal Reserve Chair] Janet Yellen thinks the stock market is reasonably valued. So when the next inventory liquidation comes storming into the 'incoming' data don't expect her and her merry band of money printers to have a clue. They never do."

Scott Grannis, former chief economist at Western Asset Management, was more optimistic in the face of weaker-than-expected retail sales in the first quarter.

In a column for his Calafia Beach Pundit blog, Grannis said declines in oil prices typically are associated with a growing economy.

"So it is reasonable to think that the weakness in retail sales in the first quarter will be followed by stronger growth in the current quarter. Money saved as a result of cheaper gasoline is likely to be spent on other things, and lower energy prices in general lower the economic hurdle rate for new economic activity," Grannis wrote.

In an April update for investors, Richard Moody, chief economist at Regions Financial, said March retail sales gains were not enough to save lukewarm first-quarter results, but they might signal an economic thaw is ahead.

"The March retail sales data certainly don't undo the declines posted in the prior months but, looking ahead, they at least put a firmer base under consumer spending and what should be significantly faster Q2 growth," Moody predicted.

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Business inventories in the U.S. are stacking up much faster than sales are, an omen of a violent liquidation to come that could mean a tumbling national economy, according to David Stockman, White House budget director during the Reagan era.
Stockman, business, inventories, retail sales
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2015-00-16
Thursday, 16 April 2015 07:00 AM
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