Business Inventories

Chart of the Day: A Look at Business Inventories – How Deep is a Coming Recession?

By now we have all heard of a potential economic recession coming, despite Treasury Secretary Janet Yellen stating that it is not “inevitable.” A recession technically is defined as two consecutive quarters with negative GDP growth. Q1 2022 GDP growth was -1.5%, and Q2 2022 is tracking near zero.

So, yes, the economy is practically in recession now. The question is – how deep will this recession be? There are many ways one can look at this question, but in this article, we can look at Business Inventories to postulate the answer to this question.

First off, what are Business Inventories? Business Inventories is a shortened term that refers to the “Manufacturing and Trade Inventories and Sales,” a monthly report released by the U.S. Department of Commerce. The business inventories report is compiled from three sources: the Monthly Retail Trade Survey, the Monthly Wholesale Trade Survey, and the Manufacturers’ Shipments, Inventories, and Orders Survey.

  1. Monthly Retail Trade Survey: Retail merchandise inventories are the value of goods held for sale at the retail level at cost as measured primarily by the FIFO (first-in, first-out) method of valuation.
  2. Monthly Wholesale Trade Survey: Inventories at wholesalers, the companies that distribute to retailers, are added to the Business Inventories numbers each month.
  3. Manufacturers’ Shipments, Inventories, and Orders Survey: At the manufacturing level, stocks of goods, whether in raw material, work-in-process or finished, are valued at cost, again primarily by FIFO.

The sum of the three components is the Business Inventories figures released by the U.S. Census Bureau. See the current Business Inventories trend in the chart below and see the source data here.

Business Inventories 2022-04

What this Business Inventories chart shows is that they have recovered to pre-covid levels and have extended above trendline growth by nearly 10%. These inventory build-outs have resulted in additional GDP growth in recent quarters – fueled by Fed and government stimulus. But was this GDP growth justified?

One way to see if the recent GDP/Business Inventories growth was justified is to look at employment data. After all, Business Inventories are to be eventually sold to people that can pay for them. See this in the chart below and see the source data here.

Fed Employment 2022-05

From what we see in the data above, employment has merely returned to pre-covid levels and has NOT extended by 10%. The hypothesis is that the Business Inventories that are 10% over trendline growth will need to be worked off in the coming quarters.

Using the Business inventories as a proxy for business activity, we could postulate that the business activity (GDP) post-covid and post the initial covid shock (negative and positive), the economy will need to be discounted for this factor over the next few quarters. Using eyeball mathematics, one could say that this GDP contraction could be similar to the “Great Recession” back in 2008.

GDP Growth Rate 2022-Q1

To go back to answer the question – how deep will this recession be? The suggestion is that the coming recession could be similar in-depth as it was in 2008. Of course, this is on top of any other factors such as – geopolitical hot spots, natural disasters, pandemics, energy shocks, supply chain issues, political unrest, Fed policy, and any potential new government stimulus.

Do note that recessions are not always deflationary. The coming recession can take another form – a topic for another article.

This is all predicated on whether the Fed does what it has said it would do and keep rates at a rate that will tackle inflation. Many are starting to believe the Fed will buckle soon and begin a massive stimulus if the recession comes in too strong – see here. This will only stall the inevitable, and build an even bigger problem, with even bigger negative results.

What could go wrong?

See more Chart of the Day posts.

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 RWR original article syndication source.

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  1. Very truthful article. The people of the USA know we are in trouble some just don’t want to admit it. SMH Wake up to the truth America! Stop all the lies. Just being honest.

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Written by Tom Williams

Born down on the farm in America's Midwest, my early life was spent climbing the ladder via a long career in information technology. Starting as a technician, and after earning a degree going to night school, I eventually found a place working at ATT Bell Laboratories as a software engineer.

Later moving into management and then a long stint in a major management consulting firm working with major banking, telecommunications, and retail companies. Working in various states in America, I also spent considerable time living and working in several European countries - currently expat in France. As a side career, I was heavily involved in real estate development and an avid futures trader. This experience can give one a unique view of the world.

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