US retail inventories climb higher, but sales rise, too

William B. Cassidy, Senior Editor | May 13, 2016 2:17PM EDT

U.S. businesses added to their inventory in March, with stockpiles of goods making their biggest leap upward since last June, rising 0.4 percent, the U.S. Census Bureau said Friday.

Retail inventories rose fastest at 1 percent seasonally adjusted, likely in advance of spring sales. Excluding motor vehicles, retail inventories also rose 0.4 percent, the data show.

That’s good for the economy, in terms of gross domestic product in the first quarter, but not so good, perhaps, for the freight economy, as bloated inventories depress shipping demand.

There’s little hope for a significant drop in inventories any time soon. “High inventories should be an issue that will be with us for the remainder of the year, if not into 2017, unless we all go shopping real soon,” Lee Klaskow, senior analyst for transportation and logistics at Bloomberg Intelligence, said at the 2016 NASSTRAC Shipper Conference.

Some people, at least, are heeding that call. U.S. retail and food service sales rose 1.3 percent in April, the biggest increase in a year, climbing to $453.4 billion in April, according to an advance estimate released by the Census Bureau Friday, which is a 3 percent year-over-year increase.

That could make a dent in some business inventories when the Census Bureau releases its April figures on June 14. 

Higher-than-expected inventories collided with strong truck purchases last year, creating a glut of capacity in the U.S. truckload market that has shoved spot and contract rates down.

Lower truckload rates in turn are depressing intermodal rates and low fuel prices have sliced fuel surcharge revenue, pushing down revenue at many of the largest trucking providers.

Trucking companies and intermodal operators have been waiting for a long-promised inventory destocking, but so far they wait in vain. The general U.S. business inventory-to-sales ratio was flat in March from the previous two months at 1.41, up from 1.37 in March 2015.

That means it would take businesses 41 days to sell inventory on hand. The ratio for retailers is even higher, and rose from 1.5 in February to 1.52 in March, up from 1.44 a year ago.

The increase in private inventories in 2015 did help kick GDP up a notch or two. In 2014, inventory investment added 0.05 percentage points to annual GDP growth of 2.4 percent, Federal Reserve Bank data show. In 2015, that figure leaped to 0.17 points out of 2.4 percent growth. U.S. GDP growth would have been closer to 2.2 percent without the buildup.

The fact that inventories remain stubbornly high could mean GDP actually grew faster in the first quarter than the 0.5 percent expansion rate, the U.S. Bureau of Economic Analysis estimated. The Commerce Department agency’s second GDP estimate will be released May 27.

It’s possible inventories are as high as they are because that’s what businesses want. Retailers and businessesstung by stock-outs in 2014 and concerned by the West Coast port labor dispute that fall rapidly built inventory. That increase was clear in the jump in U.S. inventory-to-sales ratios in late 2014. For the most part, inventories have been rising ever since.

Shippers haven’t forgotten how to manage inventory, American Trucking Associations Chief Economist Bob Costello said at the NASSTRAC conference last month, they’re simply keeping more inventory on hand, and having a harder time forecasting demand in a soft economy.

Several shippers tell JOC.com, however, that reducing overstocked inventories is high on their to-do list for 2016. There’s concern higher interest rates will increase inventory carrying costs. Also, old stock needs to make way for more current stock. But it is much more difficult to de-stock, they say, than to add stock.