Inventories Decline, Sentiment Up Slightly, Shipping Still Weak

Wholesale Inventories Decline 
Wholesale inventories dropped 0.4% in September, the most in nearly two years, and worse than the consensus of -0.3%. It was led by a 0.9% decline in nondurable good inventories, mostly in farm products, drugs, and petroleum, partly reflecting lower prices of those goods. Wholesale sales were unchanged. The inventory-to-sales ratio held at 1.36 for the fifth straight month, its highest level since May 2016. It had spiked since mid-2018, as the U.S./China trade war intensified and businesses accumulated inventories ahead of expected tariffs. With some talk of tariff rollback as part of the phase-one trade deal between the U.S. and China, we could see some reversal in the wholesale inventory build-up. If this is indeed the case, it would lead to better alignment between demand and supply, but could be a short-term drag on GDP growth (through a negative contribution from the inventory component). While still very early in Q4, the GDPNow Model is tracking just 1.0% real GDP growth for the quarter, with -0.5 ppt contribution from inventory investment.

Consumer Sentiment Up Slightly 
The Reuters/University of Michigan Consumer Sentiment Index ticked up 0.2 points in the preliminary November survey to 95.7, contrary to the consensus of a same-size decline to 95.3. Consumer expectations rose 1.7 points, its third gain in a row, but current conditions flopped 2.3 points. Sentiment peaked in March 2018, but remains elevated and range-bound longer-term, which suggests that consumer spending will continue to support the ongoing economic expansion. Nevertheless, the y/y momentum in sentiment has weakened, implying a slower pace of real GDP growth ahead.

Cass Shipping Index Contracts Again

• Consistent with disappointing housing starts (down -1.8% YTD) and lackluster auto sales (down as much as -4.8% in April and -1.2% YTD), spot pricing in transportation has declined dramatically.
• Airfreight volumes in Europe continue to suggest that the region’s economy continues to cool.
• Asian airfreight volumes were essentially flat from June to October 2018, but have since deteriorated at an accelerating pace.
• Even more alarming, the inbound volumes for Shanghai have plummeted. This concerns us since it is the inbound shipment of high-value/low-density parts and pieces that are assembled into the high-value tech devices that are shipped to the rest of the world. Hence, in markets such as Shanghai, the inbound volumes predict the outbound volumes and the strength of the high-tech manufacturing economy.

Source: Ned Davis Research, Cass Information Systems