During February, wholesalers' sales fell 0.2% mom, the fourth monthly contraction in succession, whilst their inventories fell 0.5% mom, the fifth monthly fall in a row. In fact, things are a whole lot worse than that for wholesalers: sales have been gently sagging since towards the end of 2014, and the continued rise in the inventory/sales ratio suggests that wholesalers have been unwilling or unable to adjust their business strategies and balance sheets to reflect that fall. As a result, the inventory/shipment ratio has continued to rise practically unabated since the end of 2014, even though total holding of wholesale inventories peaked in September 2015.
To understand what's going on, it pays to contemplate the role of wholealers in an economy. The point of wholesalers it that they absorb (buffer), and finance, the temporal frictions between suppliers and end-customers, with both ends of the bargain content to pay a fee to ensure more predictable supply, more predictable demand. Such a role cannot abolish business cycles, but will smooth frictions within the cycle. Indeed, it is precisely when wholesalers are faced with changes in business conditions which they can no longer absorb/finance, that they themselves become key indicators of a business cycle inflection point. The inventory/shipment ratio rises, and wholesalers move to cut their risk, passing on the market’s bad news to the manufacturer. This is a familiar feature of business cycles, seen both in 2000/01 recession and again, more spectacularly, in 2008/09. (It has its corollary in NE Asia when manufacturers’ inventory/shipment ratios are a regular bellwether for NE Asia’s export prices and industrial cycle.)
But as the first chart shows, wholesalers’ inventory/sales ratio has been rising almost continuously since the middle of 2014, and is now the highest it has been since early 2009, and above the peak levels seen during the 2000/01 recession. And yet there is no recession (despite the poor profits outlook), and the sustained strength of labour markets makes it very unlikely we’re about to see one now. Moreover, unlike in 2000/01 and 2008/09, the problem is not an unwanted build-up of inventories (they’ve been flat since the middle of 2015), but rather the sustained fall in sales.
There is a further reason to think something structural, rather than cyclical, is afoot. The second chart expresses wholesalers’ sales as a proportion of manufacturers’ and retailers’ sales combined. What is shows is that wholesalers’ market share of total sales has been flat since mid-2011, and has been in steady decline since the middle of 2014. In January, wholesale sales’ market share fell to its lowest since December 2010. No such extended period of market-share loss was seen either in 2000/01 or in 2008/09. No such extended decline was seen during the wild commodity gyrations of the last 15 years.
So wholesale ain’t what is used to be. Quite possibly, wholesalers’ difficulties are not this time a key cyclical indicator. Why? Once again, remember, the wholesalers’ role is to absorb and finance the frictions between supplier and end-buyer. If that role is under challenge, it is likely to be either because frictions have become easier to manage (ie, to predict and anticipate) and/or because they have become easier to finance. Or both.
If information technologies are sufficiently distributed and trusted to cut the friction between supply and demand, and at the same time, financing conditions have improved post-crisis, the need for and role of the wholesale trade becomes smaller. If that is what is happening, today’s shocking fall in wholesale sales is poor news for the wholesale trade, but perhaps not quite so dreadful for the US economy as a whole.
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