TLT - Wholesale Trade November 2023: Soft Landing

2024-01-10 12:30:44 ET

Summary

• The Wholesale Trade Report is an important indicator of economic activity that provides data on sales and inventories of US Merchant Wholesalers during November 2023.
• The report suggests that the U.S. economy continues to grow at an above-average pace, but the rate of growth is slowing somewhat.
• The report is supportive of the "soft landing" narrative.  However, it is not supportive of market expectations regarding the timing and extent of Fed rate cuts.

The Monthly Wholesale Trade Report ("WTR") was published by the Census Bureau on January 10th, 2024, at 10:00AM. This report provides data on sales of US Merchant Wholesalers’ (except manufacturers’ sales branches & offices) and their inventories, during the month of November 2023.

Although the WTR is rarely discussed in the popular financial media, the most astute analysts should (and do) follow it. Wholesalers Sales is an important indicator of overall U.S. economic activity; it is one of only eight monthly indicators cited by the National Bureau of Economic Research ((NBER)) Business Cycle Committee ((BCC)) for its tracking, classifying and dating of U.S. business cycles.

In this article, we will walk our readers through an in-depth analysis of the Wholesale Trade data. We will then discuss how the data have impacted our outlook for the U.S. economy, financial asset prices and portfolio strategy.

Summary Data and Analysis

We begin our review of the Monthly Wholesale Trade Report for September with summary data and analytics highlighted in Figure 1. We recommend that readers pay particular attention to the percent rank of Month-on-Month (MoM) growth, MoM acceleration, and the surprises relative to forecasts.

Figure 1: Change, Acceleration, Expectations, and Surprise

The total nominal value of Merchant Wholesalers Sales was estimated to be $666,628 during the month of November of 2023. This represented a decrease of -0.02% compared to the prior month – a historically low MoM rate of change (31.9 percentile). This rate of change represented an acceleration of +1.47% compared to the MoM change in the prior period.

The Impact of Inflation

In this section, we highlight the impact of inflation on the interpretation of Wholesale Sales data. Inflation impacts the amount of goods and services that can be purchased with a given amount of money. In order to measure the actual quantity of goods that wholesale merchants sell (as opposed to their dollar value which is impacted by inflation/deflation), it is necessary to adjust the nominal sales figures (reported in “current dollars”) for the impact of price changes. In this particular regard, we are one of the only firms in the world that performs detailed line-item inflation-adjustment of Wholesale Sales data. In Figure 2, we show Wholesales Trade in both “current dollars” and in “real” terms. The “real” figures represent the “constant” value of wholesale sales, after inflation-adjustment.

Figure 2: Wholesale Sales in Current Dollars and Adjusted for Inflation

The MoM rate of inflation in the wholesale sector was -0.51% – an annualized rate of -5.94%.

After accounting for the effects of inflation, the MoM change in Merchant Wholesaler’s sales for the month of November is adjusted downward from the nominal (“current dollar”) figure of -0.02% to the real figure of +0.49%. In both nominal and real terms, growth in wholesalers sales accelerated, albeit less so in real terms.

For the remainder of this article, all figures will be presented in “real” (inflation-adjusted) terms. This is important because the most significant indicators of economic activity in the U.S. economy, such as Real Gross Domestic Product and Real Gross Domestic Output, are accounted for in real (inflation adjusted) terms.

Analysis of Rates of Change: Assessment of Momentum & Intersectoral Behavior

In this section we analyze the rate of change of Real Wholesalers’ Sales over various time frames (1m, 3m, 6m and 12m). We also compare the rates of change data of all of the industry groups that aggregate to the total rate of change of Wholesaler’s Sales. The purpose of this analysis is two-fold. Our first purpose is to compare rates of change of Wholesale Sales between different time frames, in order to assess the momentum in this sector of the economy. Our second purpose is to compare rates of change between industry groups (over various time frames) in order to extract potential leading signals of future trends.

Figure 3: Annualized Growth Rates of Between Periods & Industries

Comparison of Rates of Change Over Time: Assessment of Momentum

We begin our analysis of the momentum in the wholesales trade sector of the economy by noting that the 12-Month (Nov 23 to Nov 22) rate of change of Total Wholesalers’ Sales was +4.16%, which ranks in the 75th percentile of all such year-on year (YoY) figures since 1992.

Fully taking into account the November data (MoM growth of +0.49%), the annualized rate of change for the most recent 3-month period (Nov 23 – Aug 23) was 7.26% (74.3 percentile).

Comparison of Rates of Change Between Industry Groups: Search for Signals in Intersectoral Relationships

We now turn our attention to rates of change between industry groups. We begin by noting that the Durable Goods industry group tends to be more “economically sensitive” (i.e., more responsive to macroeconomic developments) than sales in the Nondurable Goods group. Therefore, durable goods sales statistics can sometimes serve as a leading indication of tendencies and trends in the growth of the overall economy – particularly in the goods-producing sectors.

Including the most recent month (MoM growth of 0.18%) the three-month rate of change in the Durable Goods sector grew at an +2.20% annualized pace, just below the median on a historical basis (46th percentile). This compares to the annualized 3 month rate of change in the Nondurable Goods sector of +11.75%, which was extremely strong in historical terms (76.4 percentile). From analysis of the relative growth in these two sectors we can draw the following inference: Growth in the more economically sensitive sector (durables) is much less vigorous, while recent growth in the less economically sensitive sector (nondurables) is so high as to probably be unsustainable in the medium-term. Both factors suggest the possibility of at least a modest slowdown in the growth of the wholesale trade sector, compared to the extremely strong recent pace.

Within the durable goods category, Motor Vehicles, Parts and Supplies (79.6 percentile) and Professional and Commercial Equipment (79.6 percentile) stood out for their relative strength in November, while Hardware, Plumbing and Heating (12.7 percentile) and Household Appliances and Electrical (16.9 percentile) stood out for their relative weakness (in terms of historical percentile rank).

Within the nondurable goods category, Chemicals and Allied Products (96.5 percentile) and Beer, Wine & Distilled Beverages (93rd percentile) stood out for their relative strength in November, while Apparel, Piece Goods & Notions (11.3 percentile) and Grocery & Related Products (12th percentile) stood out for their relative weakness (in terms of historical percentile rank).

In comparing the growth rates of industry groups at the most granular level we would note the outsized contributions from the volatile Farm Products and Petroleum Product groups, within the nondurable category. Given the strong tendency of growth in these subsectors to revert toward their means, overall growth in the nondurable goods category may tend to be weighed down by both of these sectors in coming months.

Decomposition Analysis: Industry Group Contributions to Change & Acceleration

In this section our analysis is focused on identifying contributions of specific industry groups to the overall MoM change and acceleration of Real Wholesales Trade during the past month.

Figure 4: Real Wholesale Trade Contributions to Change and Acceleration

As can be seen from this table, total Real Merchant Wholesalers Sales accelerated from -0.35% growth the prior month to +0.49% growth in the most recent month. Decomposing this total MoM acceleration of +0.83%, we can see that the durable goods category contributed approximately +0.29% while nondurable goods contributed +0.54%.

Among the subcategories, Petroleum and Petroleum Products (+0.60%), Motor Vehicles, Parts and Supplies (+0.38%) and Chemicals and Allied Products (+0.16%) were the largest positive contributors in the direction of acceleration, while the Drugs and Druggists' Sundries (-0.19), Miscellaneous Durable Goods (-0.18%) and Grocery and Related Products (-0.15%) subcategories made the largest contributions in the direction of deceleration.

The volatile Petroleum & Petroleum products sector dominated the contributions to growth acceleration in the most recent monthly period. Therefore, there is a possibility of mean-reversion in the growth of this sector in future periods that could exert a drag on future growth.

Implications for the U.S. Economy

A very large share of domestically produced goods and imported goods flow through the wholesales trade sector of the U.S. economy. Therefore, wholesales sales data contain a strong indication of trends in both supply and demand within the economically sensitive goods-driven sectors of the U.S. economy. This obviously encompasses the goods sector of the economy. However, it also encompasses various goods-driven services sectors such as transportation, marketing and retail sales.

Including the most recent month’s data, real wholesale sales growth during the latest 3-month period was very strong. However, the sector composition of that growth suggests that growth will probably normalize.

Overall, wholesales sales data seem to indicate that the U.S. economy continues to grow at an above-average pace, but the rate of growth is slowing somewhat. This is consistent with the “soft landing” narrative.

Implications for Financial Markets

The data in this month’s Wholesales Trade report is unlikely to have a major impact on asset prices. However, the strong growth in the wholesales sector is, on the margin, bearish for long-term bonds. It is also not supportive of current market expectations regarding the timing and extent of Fed rate cuts.

Concluding Thoughts

This wholesale sales report provides further support for the “soft landing” narrative that has been driving gains in U.S. equities. We suspect that this narrative will continue to dominate the early part of 2024 and portfolios should be structured to take this into account.

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