Nothing gets by David Rosenberg, the bearish strategist at Gluskin Sheff.
In his latest Breakfast With Dave note, he points to the inventory/sales ratio which is sending a recessionary signal.
A rising I/S ratio suggests sales are not keeping up with the inventory build.
Lost in yesterday’s excitement over the retail sales report, we got the June data on total business sales and they plunged 1.1% with the weakness rather broadly based. This was (i) the sharpest decline since March 2009, (ii) the third decline in a row, and (ii) represented a QoQ decline (-0.8% SAAR) for the first time since the second quarter of 2009.
Inventories rose 0.1% and are up 5% over the past year. Sales, on the other hand, have lagged as they are up just 3% on a YoY basis. The all-industry inventory/sales ratio has gone from 1.26x in April to 1.27x in May to 1.29x in June to stand at the highest level since February 2010. Omninously, in December 2007, the first month of the last recession (the one that started with everyone claiming at the time that the economy was ‘resilient’) was 1.28x. We are now above that level (say no more!).
What is interesting is that the I/S ratio in the retail sector has increased from 1.33x in March to 1.35x in April to 1.36x in May to 1.38x in June – nearly a two-year high. This is likely going to pose a challenge to pricing power in this space in the months ahead.
That final point about pricing power may already be materialising. Goldman Sachs’ David Kostin just published his S&P 500 Beige Book, which highlights the key macroeconomic anecdotes from this earnings season’s conference calls.
The second of Kostin’s four key themes from the beige book was “Challenging pricing environment.”
“Customers resisted attempts by suppliers to raise prices,” he wrote. “Some shifted to lower-cost alternatives in an effort to preserve profit margins.”