What’s in Store for the Real Economy

There is no escape.

The Census Bureau announced today that total business sales in January did what they’d been doing relentlessly for the past one-and-a-half years: they fell! This time by 1.1% from a year ago, to  $1.296 trillion, and by 5% from their peak in July 2014.

They’re now back where they’d been in January 2013. Sales are adjusted for seasonal and trading-day differences, but not for price changes. And since January 2013, the consumer price index rose 2.8%! This is why the US economy has looked so crummy.

That’s bad enough. But it gets much worse.

Total business sales are composed of three categories: sales by merchant wholesalers (33% of total), by manufacturers (36% of total), and by retailers (30% of total).

Sales by merchant wholesalers took the biggest hit: they plunged 6.4% from January a year ago, to $433.1 billion.

Symptomatic for the lousy state of business investment, sales of professional equipment dropped 4.1% year-over-year, with computer equipment and software sales plunging 10.2%. Sales of electrical equipment, the largest category among durable goods, fell 5.0%. Sales of machinery fell 1.4%. And “misc. durable” sales plunged 8.6%.

The economy’s kick-butt, take-no-prisoners winner? Sales of drugs soared 11.0% to $53.6 billion. As we found out today via Express Scripts Drug Trend Report, those sales increases weren’t caused by people suddenly taking more drugs; they were caused largely by price gouging.

Turns out, prices of brand-name prescription drugs soared 16.2% in 2015! One third of these drugs had price increases of over 20%! On average, they’re up nearly 100% since 2011. This is a patent-protected, monopolistic industry that has managed to rip off every consumer and government in the US. And there’s more. Express Scripts:

Moreover, the industry faced opportunistic manufacturers who exploited monopolies with old generic medications and captive pharmacy arrangements, and ongoing scheming by compounding pharmacies to promote sales of high-priced, no-value compound medications.

That’s a nod toward, among others, Valeant whose shares plunged 51% today. They’re now down 87% since July last year when a short seller with a big megaphone exposed the company’s nefarious practices.

Wholesales of drugs, at $53.6 billion in January, are the largest category, durable or non-durable, and make up 12.4% of total wholesales. That’s how out of whack the industry has become, after decades of price gouging.

Sales by manufactures, the second component of total business sales, dropped 2.3% year-over-year, while sales by retailers rose 2.7%. These percentage changes are not adjusted for inflation. With overall CPI up 1.4% for the 12-month period, real retail sales growth looks even worse.

This chart shows total business sales – and the elegant 5% swoon since July 2014. Sales don’t decline like this in good times:


With total business sales declining for a year-and-a-half, you’d think executives get the message and cut their orders to keep inventories from ballooning. But this just hasn’t happened. Optimism has reigned under the motto that next month will be better, that the Fed has our back, that radical monetary policies can somehow increase demand, rather than just inflate asset prices.

And so inventories kept ballooning – in January, by another 1.8% from a year ago to $1.812 trillion.

That’s up 18.5% from the peak of the prior inventory bubble in August 2008. But sales in January were up only 5.8% from their peak in 2008! And we know what happened to sales after that summer in 2008: they crashed as the Great Recession was chilling the US economy. See the cliff-dive in the above chart.

Inventories at retailers, after a lousy holiday season, jumped 5.7% in January year-over-year. As for the formerly booming auto sector, inventories of motor vehicles and parts soared 8.1%.

Whacked by declining sales and rising inventories, the crucial Inventory-to-Sales Ratio, which is a measure of how overstocked businesses have become, has totally blown out. At 1.40 in January, it is much worse than the ratio of 1.32 in September 2008, the month when Lehman filed for bankruptcy:


What happened then is this: Sales cratered, inventories built up, and the inventory-to-sales ratio spiked, ultimately hitting 1.48 in January 2009. Businesses, seeing that sales alone wouldn’t solve their inventory problem, were radically cutting their orders. This ricocheted through the economy, with entire supply chains coming to a near-halt as other businesses, whose own sales were getting cut by their customers, adjusted by slashing orders further and laying off people in massive numbers. These layoffs hit retail sales. And so it went.

Ironically, rising inventories inflate GDP. At first, economists hype it as a sign of “confidence.” Businesses are stocking up for the future boom. Much of the increase in GDP in late 2014 and throughout 2015 was based on rising inventories. But rising inventories just pull future economic activity into the present. They tie up a lot of capital, cost money and manpower to store and maintain, and can lose value to obsolescence. This is not exactly a secret. A whole science has sprung up to keep inventories low.

Businesses will eventually figure out that hope for a sales boom isn’t good enough, that sales won’t grow enough to bring inventories back in line. And just then, at the worst possible time, when profits and sales are already declining, they cut their orders to fix their inventory imbalances. This hits sales of their suppliers, and they cut their orders. As this ricochets through the economy to employment and retail sales, it cuts into GDP, as it did during the Financial Crisis, or to a lesser extent during every business cycle recession.

This is what’s in store, so to speak, for the US economy. There is no escape from inventories that are bloated to this extent: they lead to a recession when they get fixed. Unless the Fed, in a stroke of its usual genius, goes out to buy this excess merchandise as part of its new QE and stashes it on its balance sheet where it can rot quietly.

Not that this inventory fiasco worries the stock market, which has been protected by the magic of Consensual Hallucination, though that may be changing. Read…  For Stocks, a Reality Too Ugly to Behold?

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  60 comments for “What’s in Store for the Real Economy

  1. hoop says:

    interest rates are low so it does not cost a lot i assume to keep things in stock, so the fed QE’ed the stock already partly. It will keep going up probably till it doesn’t :-)

  2. nick kelly says:

    Am I misreading something? Surely drugs can’t be 12% of TOTAL wholesale? Total of everything? Are we medicated to that extent?

    • Wolf Richter says:

      Yes. And Yes.

      Total wholesales were $433 billion. Drug wholesales were $53 billion.

      I have now included both dollar figures in the text to make it clearer. Thanks for the question. I don’t want to drown my readers in an endless sea of numbers, but some numbers are really important, including those two, and I should have included them from the beginning.

    • Si says:

      I read too that the US consumes 80% of global painkiller production (staggering if true given it is 5% of global population).

      Gotta keep the masses medicated so they can take all the bs which they have to swallow.

    • Petunia says:

      The huge increase on drug spending isn’t that we use more drugs. It is that they charge us more for the drugs we use.

      My husband doesn’t like to admit it, but he use to take Viagra. I say use to because the cost has gone up from $10 a pill with insurance, which was a huge ripoff, to over $50 a pill without insurance. The insurance company stopped covering it. I think this isn’t complained about more because the guys don’t like to admit they use Viagra. However, this points to the huge gouging that is going on in healthcare in America.

      I am a republican and have always believed in national health insurance and the price gouging is a big reason why. Everywhere else in the world this drug is extremely affordable. Everywhere else in the world healthcare is affordable.

      • tom ewing says:

        consider ordering your drugs from Canada… I’m a physician and order my from there. Many are manufactured by the same company. The generics are much less. Also look for a cash price pharmacy. I’m on medicare and have medigap as well. I can purchase most antibiotics for less for cash….Hmmmm.

        • Chicken says:

          How is this done, do we submit our prescriptions online? Usually the local pharmacy receives the prescription from the physician?

          I hear of this often but always detail is scant, some detail would be appreciated!

        • RDE says:

          Actually most drugs are manufactured in India. Your $20 or $200 dollar-per-pill FDA approved American drug is then shipped in 50 gallon drums to Pfizer or Merck where they blister wrap it and send it on it’s way to burrow into your wallet.

          If you want to buy your Indian-made drugs from a Canadian pharmacy just demand a paper copy of your prescription from you doctor. Fax it to a Canadian pharmacy and have them fill it.

          Don’t fail to ask if there is an identical generic version available. Your Canadian pharmacy will often suggest one, while your American doctor or pharmacy won’t even know they exist. Why should they, since they are but cogs in a system designed to maximize extortion.

          ps: The ultimate test of a health care system is how long people live. Ever wonder why longevity is greater in so many other nations, even dirt poor ones like Cuba?

        • CRLaRue says:

          Consider ordering your drugs from India. 90% off! Works for me!

      • Sandy says:

        Big Pharma cartel, backing Hillery, is running US health system.
        We get what Congress & Senate agreed to….until it breaks. Then we get nothing.

  3. BoyfromTottenham says:

    Hi from Oz Wolf,

    Good article. But surely the LHS scale on the Total Business Inventories graph should be the Inventory to Sales Ratio (as %), not $billions? Otherwise I bet US businesses would love to have only $1.4bn in Total Inventory!
    BTW, I think the 2016 recession is going to be awarded the prize for ‘most reluctant official admission of a US recession’. In fact, the way things are going, your govt may not admit the US is in recession until after the recession is over! Best of luck to you all.

  4. nick kelly says:

    I wonder if all the stop- loss orders and puts on Valeant were executed to the customers instructions. I understand the stop loss orders on another Canadian flame- out, Sino-Forest were not, with one fellow with a stop loss order at 16 and change getting out at 6 and change after the market gapped.
    I think this could be a fertile field for research because a large segment of the under 40 traders think they are protected against ANY downturn. In a normal environment they might be but it looks like better than even that the 1987 one day 23 % loss is going to be taken out.

  5. Akam15 says:

    At the end of your article you mention gov’t buying this excess inventory. That’s happened in China with the gov’t buying stockpiles of oil, iron ore, coal, cotton, rice, soy and a bunch of other commodities. It’s one thing to store stockpiles of oil and coal but rice and other crops rot over time. And the Chinese gov’t is experiencing that today and having to write-off huge sums and adding to its debt pile that no one wants to deal with.

    • Wolf Richter says:

      Actually, I said the “Fed” (not the government) might buy this stuff as part of QE. This was irony, so a form of humor. But these crazy days of ours, some of my most ironic expressions have become reality a little while later.

    • d says:

      India where children STILL starve to death in the streets.

      Yet the indian state buys local grains to stimulate the market price then leaves 10’s of thousands of tons of it, stacked outside in sacks, to rot, every year.

      China buys rice and cotton among other perishables, and does the same as india, it will not even export the product as aid.

      Socialist Wealth Redistributing, Subsidizing, and Central Command economies, do things like that.

      Also, one needs to remember the western, Butter, Grain, cheese, wool, Etc, mountains of the late 70’s early 80’s.

  6. Mike R. says:

    The Fed/Treasury/Top Government Leaders may well be in over their head if this economy continues to detiorate substantially. It is clear they can’t “buy everthing” up. It is clear, as I’ve stated before, that they have been propping up the stock market, but again, the thing they couldn’t do is hold it up with massive and ongoing selling. That is why when we get a sell-off, you see lot’s of positive press out and magically, slowly, the market moves back up. They kill the selling pressure and then squeeze the shorts.

    Notice how oil has come up and held. Again, alot of manipulation going on in the oil futures markets and alot of propaganda. The games not over with though as the excess oil continues to flow. At some point, it will be obvious that current prices can’t hold and you’ll see a big move down.

  7. hoop says:

    also it seems jp margon have cornered the aluminum market with free money.

  8. Tom Belstler says:

    My Father in Law, who was a Saint, owned a drugstore in a very small, very poor town in rural upstate New York. He sold the drug store about 12 years ago. He once told me that he feared for his customers pharmaceutical needs because drug companies then were rapidly raising prices, sometimes twice a month on some drugs so this price gouging has been going on for a long time. His solution was to quietly discount the price to his poorer customers. If he knew someone was sick and had no income and needed medication, he would supply the medication for free and sometimes personally deliver it to their home. However, this is not how it works for the majority of people and more and more people are being rationed out of necessary medications.

    I use insulin and was paying $80 a bottle for it in the US. I found that I could purchase the same bottle through a Canadian Pharmacy for $30. That worked fine until big Pharma complained to Congress about it and they passed a law that stopped me from importing it across the border. That same bottle of insulin is now priced at $256. Thankfully I am now back on my wife’s insurance so the costs are covered.

    • Toddy says:

      Oh so THAT’S why my premium is going up again…

      • walter map says:

        The Medical-Industrial Complex has long since become an extortion racket: “Your money or your life”.

        Apparently, ‘free markets’ are those which have been freely monopolised. I still think it was a mistake to legalise piracy, but the pirates insisted.

    • Chris says:

      Cheers to your father-in-law! Altruism and capitalism are not mutually exclusive. Corporate America should take a page from his book of life. Big pharma is just another example of the cronyism that running rampant in our government at the expense of the ordinary American. This cronyism is just one reason, but a big one, that Trump is doing so well. The average American feels (rightfully so) disenfranchised from their government and the political parties.

    • RDE says:

      The costs of pharmaceutical extortion may now be covered for you, but the costs to society from having so much of it’s wealth bled off are not!

  9. James McFadden says:

    X axis of tot business inventory plot is screwed up

  10. Huntly says:

    Surely we can just blame all this on the Weather. Right!

  11. Álvaro says:

    I really like this website.

  12. Agnes says:

    I googled “Inventory to sales ratio” because I am always suspicious of a graph that compares the present to a point too close to the Y axis. In this case I was easily able to find a graph going back to 2004, which showed the average ratio in that period was between 1.25 and 1.30. Upon further study it became apparent that that “average” was actually the Bottom in a graph from January 2016 going back to 1981. Nonetheless your point about a spike seems well taken, even after years of just-in-time inventory.

      • Mick says:

        Businesses have become much more efficient in recent years, through technology they’re reduced their inventories to a minimum.
        So a graph from decades ago showing how inventory levels now aren’t that high is irrelevant since businesses have not only become more efficient, but that efficiency is required to turn a profit now, since it’s assumed.

        So inventory levels like these really are a problem because businesses have not factored them into their business model.

    • Wolf Richter says:

      Agnes, as Mick pointed out, the past decades are irrelevant in terms of this chart because technologies for inventory management and supply chain management have totally changed.

      Back in the day, when I started out, some companies, including one of our subsidiaries, were still using INDEX CARDS (one for each part number). Back then, having a 90-day supply was the norm in that industry.

      Over the years, we brought that down to 60 days via computerization and better software tools. This was the late 1980s. Then we continued to work on it, and technologies continued to improve.

      Today inventory management and supply chain management have reached a level of sophistication that we could only dream of in 2000!

      The purpose of these technologies is to keep inventory low AND have everything you need in stock.

      So a soaring inventory-to-sale ratio like this is a terrible thing – because businesses will get their inventories back in line, and they’ll do that by ordering less, which has a strong recessionary impact (business cycle recessions are caused by that).

      • Sandy says:

        This is already showing in fewer choices of items stocked in Home Depot and other big chains. Example, Home Depot stocks one kind of solid door.

      • Tom Belstler says:

        I live 3 miles from the entrance to the BMW plant in Greer, SC. They are currently in the process of building their third billion dollar addition. BMW is very, very serious about just in time inventory to the extent that they tell their suppliers to build their plants as close to their multi square mile plant as possible in order to minimize transportation time and costs. They have a rail spur right into the plant. SC built an inland port for them on the main east west rail line two miles from the plant. Originally it was planned that BMW would be the primary user of its capacity but to everyone’s surprise other users have now filled it to capacity and they are considering building an addition. At this point, construction of the main plant is just beginning but suppliers are already building additions and new plants. Every parcel of land suitable for either commercial or industrial use is either being built on already or is up for sale. Hundreds of acres of woodlands have already been cleared and put up for sale. There are more than a dozen big trucking outfits within a 10 mile radius of the plant, many much closer than that.

        One more illustration of the drive to cut inventory costs at all levels. BMW pioneered the use of ‘car kits’. They put the vehicle components into a 40 foot shipping container for overseas shipment. The vehicle is then transported to Charleston for shipment and then assembled in the destination country. This method has a lot of advantages over putting the entire unprotected vehicle onto a specialized car carrier ship.

      • Chicken says:

        Take oil for instance, plenty of inventory! :)

        • Wolf Richter says:

          Yes. But… In this data series, inventories are priced in dollars. And the price of oil has plunged from a year ago. So the huge amount (in terms of barrels) of oil and petroleum products in inventory, when measured in dollars at the wholesale level actually fell 25% from a year ago to $32 billion.

  13. Petunia says:


    As the assigned shopper/spender in the family, I spend a lot of time trying to find the best deal for our every need. I don’t see the inventory buildups in the stores. I see the opposite.

    I think what you are seeing is another accounting trick by the retailers. They hold the inventory at “retail prices” until they finally unload it, at a discount. That would explain the high inventory levels and the low sales.

    • Wolf Richter says:

      Petunia, a couple of things:

      There is a big difference between what is on the shelf at retail stores, what is in inventory in their supply chain, and what is in inventory in all businesses across the US.

      Autos make up about 20% of total retail sales, and auto inventories are bloated!

      Inventories are measured in terms of how many days/months it takes to sell this inventory. This function is dependent on sales. So if sales decline, and inventories remain the same, relative inventory levels begin to bloat.

      The Census figures are not based accounting figures but on its own methodology with includes surveys of companies.

      So I don’t think it’s another “accounting trick.”

  14. Andros says:

    The time scale of the total business inventory graph seems to be off (Jan 05 to dec 12). Could you clarify or fix? Thanks.

  15. nick kelly says:

    I can’t think of a more promising campaign issue for the Democrats than the drug ripoff. I see potential for software also- a national link showing with minimal key strokes- the average cost of a drug and its generics.
    It might be a tall order to create a single buyer, who negotiates for all users, but a single info platform would help prevent gouging.

    • Sandy says:

      The Dems won’t touch it. Hillary gets her $ from big pharma.

    • Roger Beesley says:

      The democrats won’t touch this issue, neither will the GOPe, however we do have a choice; see particularly item 7 in the link below. One of the main reasons that DT is universally detested by the political elite is that he, and he alone, has raised this issue and identified the incredible price gouging that is going on.


  16. Mike says:

    I don’t think there is anything genius about what the Fed is doing. The simply create money to buy garbage that no one else wants, like US debt. In this case, it might be unsold inventories. And the stock market is not going up because of hallucination, it’s corporate buybacks engineered by the ECB. http://www.counterpunch.org/2016/03/15/draghis-giant-giveaway-more-handouts-for-wall-street/

  17. orion says:

    wolf can you clarify something for me. we here all this backlash towards Keynesian economics, but Keynes was never a monetarist. it was more fiscal policies and Milton friedman was about expanding money supply. which is more of the mess we are in with QE’s. when did all this change? or did the two mixtures of kool aid get mixed together?

    talking about inventory, was just on oil price.com and read that in 2015 oil stocks rose above 3 billion barrels globally. we sould stop producing oil today and be good for almost 3 years. that’s a lot of oil.

    • raybiese says:

      3 billion bbl/ 94 million bbl oil/day= 32 days…. not 3 years

      • orion says:

        My math was a bit off. apologies. But im sure we dont use 3 billion barrels in a month. But i get your point. Regardless its a lot of oil and its gonna take a really long time to dwindle the excess’

  18. Kreditanstalt says:

    Remember when we were young, back in the 1970s or 1980s…? We didn’t hesitate to pay Full Retail Price for VHS movies, DvDs, appliances, clothing…the works. I remember paying over $20 for a VHS version of “My Fair Lady” back then…and, even today, stores continue to try to tempt consumers into continuing to patronize these old, lazy, wasteful-spending business models…

    In short, the economy doesn’t work when everyone is price-conscious. The system NEEDS to see discretionary income (don’t have any now!) spent on high-profit, low-cost fluffy consumption items. Buying groceries simply won’t cut it.

    What’s changed is that per-capita productivity is now so dismally low in developed nations that consumers’ discretionary income has SHRUNK…and no amount of money-pumping will improve that productivity.

    Just the opposite, in fact…

    • TheDona says:

      Also add in the other expenses that we have now that we did not have in the 70s and 80s….. Car insurance was not required then (at least here in Texas), health insurance was not required and health care was affordable (Xray in 1979 at Houston orthopedic office and the entire appointment plus Xray was $100), Vaccine requirements were minimal, Prescriptions drugs were rare (my parents and Grandparents didn’t take any), apartments didn’t charge for electricity (and I don’t recall my parents complaining how high utilities were at their house), no cell phone bills and landlines were cheap (granted long distance was pricey), TV was free, we weren’t afraid to drink our tap water.

      I can’t tell you how many $250 circuit boards I have replaced on my top of the line appliances. Back in the 70s and 80s Appliances lasted forever and you could fix them yourself. Still have an ancient fridge in my garage that runs like a champ and has served as back up to my circuit board eating Maytag.

      One could fix their own car.

      College was cheap.

      Paychecks have shrunk in the scheme of things while at the same time the amount of required spend items have gone up dramatically. Also too many things we have to spend money on to service/replace so less actual discretionary income.

      Seriously…does anyone remember their parents complaining about the price of utilities or medical care back in their day? What the heck has happened?

      • Robert says:

        These are all good points, and amusing (I found, among my father’s papers 1953 receipts for milk and diesel heating fuel- each 23 cents/gal), but remember, the world was less than 1/4 today’s population- every one is competing with a hell of a lot more people for goods, and the prices must rise. (but the blame for the decline in quality falls largely on the consumer, who could demand better. The decline in education has rendered him unable to discern real quality from cheap imitation, sadly.)

        • TheDona says:

          Hi Robert. The olders do not remember quality anymore (frog in the cold pot heating up slowly) and the youngers have never been exposed to it.
          Rant alert!….
          My right of passage as a teen was having my Grandmother take me to the only high end store in Houston and walk me through each department to show and explain what quality means. As a teen, even I could afford leather soled, kid skin lined shoes on Babysitting money. What a luxury now!!! Italy was the best of leather goods (carried in the expensive stores) followed by Spain and number 3 was Portugal (in the more middle class stores). So I was in the Spain and Portugal arena. LOL Those days are long gone. Most goods are made of pleather now. Gross! Not attractive, not at all comfortable and basically throw away by design. Take quality cotton goods….if you can find them now….I have 20 year old 800 thread count Egyptian cotton sheets (thanks TJ Maxx) that might possibly last me the rest of my life. We still use my GM’s 80+ year old linen napkins at family get togethers. They wash and wear great and still so soft. Still have Grand Parents 80 year old Woolrich and Pendleton blankets we use outside while watching the bonfire at our Redneck getaway. I have 38 year old small appliances (sewing machine, Oster Kitchen center etc) that may look ugly but continue to crank it out because ALL OF THE GEARS ARE METAL and do not wear out. Plastic gears seems like an oxymoron. The blender on the Oster kitchen center is the only blender I have owned in my life….and I do love me some margaritas. Most people I know end up buying a blender every few years.

          Of course the overlords want us in a constant buying mode as it keeps our “consumer driven economy” afloat.

          I so miss those quality shoes….

      • Not my name says:

        “What the heck has happened?”

        I think it’s called “a fundamental transformation of America”.

  19. Ken says:

    A headline in the newspaper today AP story. “Low gas prices drag down US retail sales”. The gist of the story appears to be the consumer is not spending money on junk they have no need for. They are saving money. “The figures suggest that consumers remain cautious about spending despite steady hiring.” All of you criminal savers better start getting rid of your cash hoard!

    • Colorado Kid says:

      I had a nice 10k in cash in the tow of my worn-out boot in the bottom of my closet and just took it and bought a camp trailer. No more paying rent for me!

      Is that what they’re talking about? That kind of getting rid of our cash hoard? :)

    • bud says:

      I take with a grain of salt anything said or printed be mail stream media NOW including NPR.

      Computers must be making up some of these stories, people can be… “Low gas prices drag down US retail sales”. That makes no sense.

      Retail sales are down because folks are nervous, don’t have money to spend, have figured out that they don’t need MORE….no matter how cheap it becomes.

      Go put something worth $50 on Ebat for a buck, and see how long it sit there.

      • Tom Belstler says:

        I’m with you concerning the media. I no longer watch any mainstream US news programs including NPR. I tape the local channel for the weather report so I can skip the before and after commercials. I don’t read mainstream newspapers any longer and I don’t listen to the radio, preferring audio books or my iPhone music library instead. I read some foreign newspapers including Middle Eastern and English language Russian and Chinese ones and have a list of columnists that I read on a regular and semiregular basis. I read a lot of books on economics that present what is happening in the world today from various angles. From all these sources I sort out the impossible the improbable and bring a healthy dose of skepticism, logic and rational thinking to the rest.

    • Not my name says:

      “A headline in the newspaper today AP story.”

      Really? How stupid is it possible to become? I think that the logical inverse would be “High gas prices drag up US retail sales”!

  20. marmico says:

    Manufacturing and Trade Industries Sales in chained 2009 dollars from January 2008 through December 2015 (to map your chart).


    In 2009 chained dollars, sales are up 3.9% since July 2014.

    • Wolf Richter says:

      No business reports sales and earnings in chained 2009 dollars. That causes all kinds of distortions and leads to some pretty silly results.

Comments are closed.