Inventory expansion continued to moderate in May after peaking earlier in the year as firms pulled forward economic activity to avoid tariffs.
In our view, this suggests a wait-and-see approach and a hedge against a slowdown in consumer spending and overall growth.
Ahead of the second-quarter gross domestic product data, which will be released on July 30, inventories along with the trade balance will be the major swing factors in what will most likely be a top-line increase of 2.5%.
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That increase will stand in contrast to final private demand from domestic purchasers, which will arrive closer to 1% and we think was roughly the real growth rate of the economy in the first half of the year.
Inventory accumulation among manufacturers, wholesalers and retailers appears to represent the divergence of thought as to how to navigate an uncertain geopolitical and domestic-policy environment.
Inventories in absolute terms
In terms of the deceleration in inventory accumulation, wholesale inventories that were growing at yearly rates of 2.2% and 2.4% in March and April grew by 1.4% in May.
Manufacturing inventories that were growing at a 1.1% yearly rate in March dropped to 0.8% in May. Retail inventories that were growing at 7.5% in November grew by only 3.2% in May.
In absolute terms, wholesale inventory levels have increased by 0.8% since last November, manufacturers have increased their inventory levels by 0.6%, while retail inventories have declined by 0.3% in absolute terms.
Inventory-sales ratios in aggregate
The ratio of inventories to sales provides a more accurate picture of how different sectors have reacted to tariffs.
Manufacturers have more or less maintained their inventory-sales ratios since 2023, while wholesalers and retailers have allowed their inventories compared to sales to drift lower since last November.
This divergence suggests that while manufacturers require a consistent inventory of intermediate goods, wholesalers and retailers appear to be more reluctant to be stuck with unwanted goods.
This view comes with the caveat that the numerator (inventories) and denominator (sales) are both reacting to the same news on tariffs and to the effect of those tariffs on futures prices and the willingness to consume.
Manufacturers of durable goods have built up inventories …
U.S. manufacturers of durable goods have significantly increased their inventory-sales ratios. Nondurables ratios are close to what would normally be expected.
… as wholesalers of durables have also built inventories …
Wholesale durables inventory-sales ratios remain significantly higher in the lumber and construction equipment category, while ratios in the furniture and home furnishings category have also increased.
Inventory-sales ratio among electric and electronics wholesalers is significantly lower than normal.
…but it’s a different story in nondurables wholesalers …
Among non-durable wholesalers, only beer, wine and alcohol wholesalers are maintaining higher-than-normal inventory-sales ratios.
… as well as among retailers
Inventory-sales ratios among retailers have been consistently lower than what would be expected in nonrecessionary periods. Motor vehicles and parts are the closest to their normal level of inventory-sales ratios, while clothing and general merchandise are the furthest from their normal levels.
The takeaway
Businesses have continued to increase inventories but at decelerating rates.
This approach suggests a sense of caution over the direction of the economy, tempered by the need to maintain adequate supplies should the tariffs increase. To the latter, we point to the sharp drop in car sales since March as an example of what consumers and businesses might expect.
