The Census Bureau of the Department of Commerce announced today that during August manufacturers, wholesalers, and retailers either shipped or sold $686.1 billion of automobiles, furniture, food, clothing, building materials and other merchandise. In the parlance of the Census Bureau this figure is known officially as Manufacturing and Trade Sales. For brevity we'll just refer to it as Sales. The recent August number, a new all-time monthly high, was 1.5 percent above July and 5.1 percent higher than August 1994. Manufacturing and Trade Sales is one of the four components that the Department of Commerce uses to formulate its Composite Index of Coincident Indicators.

On the surface, the August sales figures look good. But, if we compare this year's sales growth with the sales growth numbers for recent past years we find that the 1995 data is a bit on the low side. The sales growth rates during 1992, 1993 and 1994 were 4.24%, 5.66% and 7.87% respectively. For 1995 the annualized rate of growth during the first eight months was 3.31%. With the exception of the 1990-91 recession period, this is the slowest growth rate in the past 9 years .

Also, during August, the same manufacturers, wholesalers, and retailers reported $969.1 billion of merchandise that had not yet been shipped or sold. The Census Bureau calls this figure Manufacturing and Trade Inventories. We'll call it Inventories, for short. This August figure was 0.4 percent above July and 8.05 percent above August 1994.

Let's take a look at how inventory growth stacks up historically. During 1992 and 1993 inventories grew at rather sedate rates of 1.11% and 2.63%. But, during 1994, concurrent with 5 consecutive interest rate hikes, inventories grew at a rate of 6.45%. For 1995 the annualized rate of growth during the first eight months was 8.60%. This compares with recent cyclical highs of 7.81% in 1988 and 9.27% in 1984. In the past few months the rate of inventory growth has slowed a little. From May to August the year-to-year rate slowed from 8.61% to 8.05%.

So, what's all this telling us about the economy? It all seems pretty straightforward. The Fed ratcheted up interest rates in 1994 and early 1995 in an effort to cool off what was perceived to be an overheated economy, and it worked. Expansion of sales and shipments by manufacturers, wholesalers, and retailers fell to less than one half the rate of 1994. At the same time unsold goods stacked up at historically high rates. The jump in the August sales figure provides a glimmer of encouragement. Between April and August sales grew at an annualized rate of 5.88%. As far as inventories go, both the short term and year-to-year data indicate historically high rates of growth.

How did the markets react? Both the stock and bond markets were little changed after the release of the report.

Byline: Lafferty (MF Merlin)