Two wire service dispatches covering the government's June Wholesale Sales and Inventories release either glossed over or completely ignored what others are saying about the report's impact on near-term economic growth.
The final sentence of an unbylined Reuters report vaguely referred to future impact by indicating that current inventory balances, which are bloated by historical standards, "would weigh on manufacturing and economic growth" (i.e., have a negative impact). Both Reuters and the AP's Josh Boak completely ignored a leading GDP forecaster's estimate that inventory buildups seen during the second quarter will cause a significant third-quarter pullback which will also knock down third-quarter economic growth considerably — and that was before today's news that the June buildup was even greater than expected. Boak's report also contained an utterly unsupportable "things are getting better" statement.
To be clear, today's news would indicate that second-quarter growth, originally reported to be an annualized 2.3 percent, is in line to get revised upward.
That's fine, but the GDP Now analysis prepared by the Atlanta Branch of the Federal Reserve on August 6 had the following to say about the third quarter:
The first GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 1.0 percent on August 6. The model projects that lower inventory investment will subtract 1.7 percentage points from third quarter real GDP growth.
Today's reported June inventory buildup was a seasonally adjusted 0.9 percent, which beat expectations ranging from 0.3 percent to 0.7 percent. May's downwardly revised increase — from 0.8 percent to 0.6 percent, partially but nowhere near fully offset June's news.
What the Altanta Fed said on Thursday, combined with today's news, indicates that the economy appears to be on track to turn in a result below 1.0 percent for third-quarter gross domestic product growth — a stark contrast to the breezy assumptions of 3.0 percent or so for this year's second half we've been seeing ad nauseam for several months. You would think, after six-plus painful years of underachievement, that the prognosticators who insist that solid growth is just around the corner would exercise at least a little caution. Nope.
Additionally, though it's highly hedged, the latest writeup at the High Frequency GDP Model managed by Moody's, home of the incurably optimistic Keynesian economist Mark Zandi, is also carrying a pretty dour third-quarter prediction:
... our high-frequency GDP model estimates third quarter GDP growth of 1.4% at an annual rate, down from 1.9% ...
... It's early and assuming the economy unfolds as we expect, third quarter GDP tracking shouldn’t remain below 2% for long. The big wild card is inventories, which have the potential to be a significant drag.
Today's news may indicate that it might stay below 2 percent — and come in far lower if the Atlanta Fed, which has been spot-on in its predictions of first-release GDP during the past two quarters, is right.
Despite all of this, the AP's Boak reassured readers that "Economists say that growth should accelerate through the end of the year." After making sure readers understand that second-quarter GDP is on track for an upward revision, Reuters only indicated, as noted earlier, that a situation like what we're seeing "would weigh on manufacturing and economic growth." No, folks, if the situation as the government described today remains as reported and continues, it will weigh on growth.
Specifically, the current inventory-to-sales ratio remains at a level which contrarian blog Zero Hedge claims "screams recession." That may be hyperbole (I hope it is), but no one should be taking comfort in the circumstances seen below:
The wild card is sales. Though the raw (i.e., not seasonally adjusted) results don't look as bad as the seasonally adjusted data this time around (a relatively unusual occurrence), what the AP's Boak somewhat incoherently wrote is not cause for much confidence:
Sales increased 0.1 percent in June yet have dropped 3.8 percent over the past year largely because of cheaper oil prices.
What Boak intended to communicate — not particularly successfully, in my view — is that June 2015 sales came in 3.8 percent below June 2014. Neither wire service noted that sales this year, both raw and seasonally adjusted, have trailed the same month in 2014 for six straight months.,
Unless monthly sales jump considerably, inventories will need to come down for firms to maintain positive or sufficiently positive cash flow. That's what the Atlanta Fed believes is already happening during this quarter.
Despite all of this, neither the AP or Reuters communicated any meaningful sense of foreboding in their writeups. In a Republican or conservative administration, they'd be all over it.
Cross-posted at BizzyBlog.com.
