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Could Inventories Be Suffering an Amazon Effect?

NEW YORK (TheStreet) -- News that wholesale inventory growth came in at a lower-than-expected .3% for December, rather than rising .5% as forecast, led to trader fretting today.

The question is whether this reflects a coming slowdown of the U.S. economy.

The government's gauge of the ratio between wholesale inventories and monthly sales stood at 1.17, seasonally adjusted, against 1.19 a year ago, the Department of Commerce said. This is much lower than it was near the start of 2013, closer to the ratio of early 2011 than some traders wanted to see.

The inventory estimates are based on a survey, however, and the results are seasonally adjusted, with the highest sales-to-inventory ratios in durable goods like hardware and machinery, where there's nearly two months' supply on hand, seasonally adjusted, and the lowest ratios in non-durables like petroleum, drugs and groceries.

The inventory ratio for petroleum inventories, .30%, was down 11.5% from a year ago, 5.1% from a month earlier, and may be behind the recent rise in energy prices, with West Texas Intermediate crude now over $100/barrel and natural gas prices for March at over $4.50 per mcf. Propane is currently in very short supply, and the California drought is impacting beef supplies, driving prices up. 

Absent seasonal adjustments, however, the changes seen in the December number don't look that bad. Petroleum sales were up 19.2% over the previous month, due to the weather, and inventories were up 1.9% unadjusted. Auto sales were up 4.8% from the previous month, 8.4% from the same month a year earlier, and unadjusted inventories were down 3.2%.

So the rate of stock accumulation slowed, but actual sales rose.

Steven Hansen at Global Economic Intersection thinks there is little to worry about. The only disappointing number, he writes, is that inventory-to-sales figure, which is below the average for non-recession Decembers.

What could causing that? Most likely there are two reasons.

First, winter started early. December was cold, so inventories of things that sell well in cold weather fell. Some goods wound up in short supply because they were in short supply, not due to demand changes.

Second is what I call the Amazon (AMZN) effect. Automation makes it easier for large merchants to reduce inventory builds. Growth in warehouse demand is now exclusively based on e-commerce, writes the Costar Group, which isn't a sell-through to stores, but to consumers.

Shorter supply chains are turning warehouses into the equivalent of retail centers and enabling other purchasers to run leaner.

Combine that with cold weather, take out the seasonal adjustments, and what you may have is a steady-as-you-go recovery, albeit at a slower pace than in the past, with automation driving the train.

At the time of publication, the author had no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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