Fundamental Report: U.S. Business Inventories Spike Higher

A key component in the U.S. Gross Domestic Product (GDP) rose more than expected in the month of October. This is a sign the U.S. economy could be slowing a bit as it means warehouses have a lot of unused and unsold stock on their shelves.

This report coincides with a recent survey that showed a possible 9.4 percent drop in holiday spending in the U.S. this year. The survey was conducted by the National Retail Association and shows the average family will spend just $681 this season. This near the 2009 figure.

The Commerce Department showed that inventories rose 0.7 percent in October. This is the largest gain since the number reported in January. September’s number was at 0.6 percent. We had expected a 0.3 percent rise.

Inventories are key component of the GDP. We saw retail inventories, not including automobiles also rise 0.2 percent. They were up 0.4 percent in September. We are noticing business building up $116.5 billion in stock for Q3. This is the most since 1998 and represents almost fifty percent of the U.S. 3.6% annual economic growth (GDP) during Q3 of this year.

This is a very strong pace, unusual to say the least. This accumulation of unused, unsold stock sitting on shelves could mean business might have to pull back spending as consumers are not buying as we had hoped. This could affect the Q4 GDP number adversely. What is odd, is that business sales were up 0.5 percent in October. Better than September’s 03 percent increase. At October’s sales volume, it would take businesses about 1.4 months to empty their shelves.

This is another factor the Federal Reserve will take into consideration next week when they decide whether or not to scale back its QE program. In all likelihood the Fed will wait till March 2014 before pulling the trigger. However, there is a chance of a small reduction next week. If it happens could be around $7 to $7.5 billion off its $85 billion a month in purchases.