Inventories rise, good for Q2 but…

May Business Inventories rose 1%, a touch above estimates of a gain of .9% and April was revised higher to also a 1% gain. Because sales fell by .1%, the inventory to sales ratio rose to 1.28 from 1.27, the highest since Dec. The gain in inventory was particularly felt at the wholesale level where it rose 1.8% m/o/m led by a 4.7% rise in auto’s, a bounce back from the 2.3% fall in April and .7% drop in March, mostly related to Japan. The inventory gain at the retail level was also led by the auto’s/parts sector. Bottom line, the gains in inventories of 1%ish in March, April and May were definitely influenced by the Japanese disaster as businesses tried to get their hands on as much product as possible in order to prevent disruptions. As seen with the sluggish pace of sales, the inventory build though could lead to smaller ordering in the next few months as this inventory gets worked down as Japan gets back to some normality and end customer demand remains sluggish. With this said, the higher inventory build will be a support to Q2 GDP.

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