Look closely at the latest Wholesale Trade data, and you’ll find what looks just like inflation. Yet, at the same time, you’ll also note what looks like American demand destruction. But if global demand remains adequate, then prices should not give as we might expect them to. Thus, there will be no counter balance, and life will get harder for Americans and the Middle Class will contract. American economic value is being destroyed, while the emerging world is enriched.
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American Economic Value Destruction Seen in Wholesale Trade Data
The U.S. Census Bureau reported the latest Wholesale Trade data covering the month of March. It showed a 1.1% increase in Wholesale Inventories, which was about in line with the 1.0% forecast by economists surveyed at Bloomberg. Wholesalers’ Sales rose 2.9%, which was even more impressive when considering that February sales were revised higher. March’s burst in sales against slower inventory growth led the inventory-to-sales ratio to improve to 1.13, from 1.16 in February. But closer inspection offers a less than sanguine perspective.
The change to February sales took its decline from -0.8%, up to a decline still of -0.3%. We speculate that February’s relative sales weakness was likely weather hampered. The rough winter, especially for the Northeast and Midwest, affected the economy in a significant way. We saw its affects across small business, as evidenced by decline in the NFIB Small Business Optimism Index, which continued that trend in April. But I also saw anecdotal evidence of trouble, as small businesses I survey were strangling this winter, and that ranged from bars and restaurants to hair salons and art galleries.
The harsh winter weather certainly hampered whatever slim construction activity that may have been scheduled for February. Perhaps that’s why sales of lumber and other construction materials climbed 7.3% in March. Certainly high ticket durable goods played a role in the March expansion, as durables sales climbed 2.3%.
Meanwhile, price increase across commodities definitely drove sales gains. An example of this can be seen in the 6.7% increase in sales of metals and minerals. Sales of petroleum and related products increased 7.9%, obviously on the rise in oil prices. Chemicals and allied products, which are tied to petroleum, saw sales increase of 6.3%.
The automotive sector was basically the only soft spot within the report, reporting wholesale sales down 1.4%. Yet, this should not be a surprise either, considering that as gasoline gets expensive, demand should lessen for gas guzzlers.
Nondurables sales increased 3.4%, driven by gains in drugs (+1.4%), apparel (+1.4%), groceries (+2.3%) and farm products (+1.7%). Those last two lead one to worry about price rise, and then we think about the reported increases in apparel prices at several retailers as well. We’ve seen consumer staple companies complain about margin squeeze for months now, and finally we’re seeing them pass through price pressures to consumers (reference Kimberly-Clark (NYSE: KMB) for just one).
Within inventory changes, we noted a 3.9% decrease in Computer and Computer Peripheral Equipment and Software. This is not a good sign for business investment, and neither is the slim 0.4% increase in durable goods inventories. Automotive inventories were down 0.5%. Excluding the food, petroleum and commodity related industries, we note drug inventories increased 3.0%. As you might imagine, all others were up significantly. Nondurable goods inventories in aggregate rose 2.0%.
Folks, if it looks like inflation, walks and talks like inflation and smells like inflation, then it’s probably inflation. This report stinks of inflation and demand destruction at the same time, and therefore fits the puzzle characterizing today’s American economy. Increasing emerging market demand for goods and services is raising prices for goods, while not necessarily raising the financial well being of Americans. What I’m seeing is economic value destruction of American wealth. We had better figure out quickly how to better benefit from emerging world development, because as American companies benefit from the leverage of their expertise overseas, that is not in turn employing enough Americans. Thus, the middle class we’ve grown so proud of may soon begin to contract.
This article should interest investors in Boeing (NYSE: BA), Raytheon (NYSE: RTN), Digital Globe (NYSE: DGI), GenCorp (NYSE: GY), General Dynamics (NYSE: GD), Goodrich (NYSE: GR), Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), Lockheed Martin (NYSE: LMT), Rockwell Collins (NYSE: COL), L-3 Communications (NYSE: LLL), EMBRAER (NYSE: ERJ), FLIR Systems (Nasdaq: FLIR), BE Aerospace (Nasdaq: BEAV), TransDigm (NYSE: TDG), Spirit Aerosystems (NYSE: SPR), CAE (NYSE: CAE), Alliant Techsystems (NYSE: ATK), Hexcel (NYSE: HXL), Triumph Group (NYSE: TGI), Esterline Technologies (NYSE: ESL), Moog (NYSE: MOG-A), Heico (NYSE: HEI), Teledyne (NYSE: TDY), Curtiss-Wright (NYSE: CW), Cavco (Nasdaq: CVCO), Skyline (NYSE: SKY), Nobility Homes (Nasdaq: NOBH), Palm Harbor Homes (Nasdaq: PHHM), Mohawk Industries (NYSE: MHK), Interface (Nasdaq: IFSIA), Albany International (NYSE: AIN), Unifi (NYSE: UFI), Illinois Tool Works (NYSE: ITW), Tyco International (NYSE: TYC), Cummins (NYSE: CMI), Kubota (NYSE: KUB), Ingersoll-Rand (NYSE: IR), Dover (NYSE: DOV), ITT Corp. (NYSE: ITT), Flowserve (NYSE: FLS), Pall (NYSE: PLL), Dresser-Rand (NYSE: DRC), SPX (NYSE: SPW), Gardner Denver (NYSE: GDI), IDEX (NYSE: IEX), Nordson (Nasdaq: NDSN), Graco (NYSE: GGG), Actuant (NYSE: ATU), Middleby (Nasdaq: MIDD), ABB (NYSE: ABB), Eaton (NYSE: ETN), Nidec (NYSE: NJ), Rockwell Automation (NYSE: ROK), Ametek (NYSE: AME), Regal Beloit (NYSE: RBC), Thomas & Betts (NYSE: TMB), Woodward Governor (Nasdaq: WGOV), Caterpillar (NYSE: CAT), Deere (NYSE: DE), CNH (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), Agco (Nasdaq: AGCO), Emerson Electric (NYSE: EMR), Parker Hannifin (NYSE: PH), Roper Industries (NYSE: ROP), Pentair (NYSE: PNR), Waste Management (NYSE: WM), Republic Services (NYSE: RSG), Fastenal (Nasdaq: FAST), Vulcan Materials (NYSE: VMC), MDU Resources (NYSE: MDU), Martin Marietta Materials (NYSE: MLM), Owens Corning (NYSE: OC), Valspar (NYSE: VAL), Precision Castparts (NYSE: PCP), United States Steel (NYSE: X), Reliance Steel (NYSE: RS), NVR (NYSE: NVR), DR Horton (NYSE: DHI), Pulte (NYSE: PHM), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), CRH (NYSE: CRH), CEMEX (NYSE: CX), Eagle Materials (NYSE: EXP), Fluor (NYSE: FLR), McDermott International (NYSE: MDR), Foster Wheeler (Nasdaq: FWLT), Empresas ICA (NYSE: ICA), Stanley Black & Decker (NYSE: SWK), Timken (NYSE: TKR), Kennametal (NYSE: KMT), Leucadia National (NYSE: LUK), Masco (NYSE: MAS), Weyerhaeuser (NYSE: WY), Quanta Services (NYSE: PWR), Chicago Bridge & Iron (NYSE: CBI), EMCOR (NYSE: EME), Snap-on (NYSE: SNA), Toro (NYSE: TTC), GM (NYSE: GM) and Ford (NYSE: F).
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