US wholesalers’ inventories are rising steadily; supply constraints are emerging

Inventories at US wholesalers rose sharply in April as companies replenished to meet pent-up demand, but supply constraints could make it more difficult to maintain the current pace of inventory replenishment.

The Commerce Department said on Wednesday that wholesalers’ inventories rose 0.8% according to estimates last month. Wholesale inventories advanced 1.2% in March. Wholesale inventories rose 5.2% in April from a year earlier.

Inventories are a key component of gross domestic product. Economists polled by Reuters had predicted that the increase in wholesalers’ inventories in April would not be revised.

“There are downside risks to building up inventory,” said Matt Colyar, economist at Moody’s Analytics in West Chester, Pennsylvania. “Supply chain disruptions could become an even more serious problem, stifling the ability of producers to replenish depleted stocks.”

Manufacturers are battling raw material and labor shortages following pent-up demand triggered by the economy reopening as vaccinations dampen the intensity of COVID-19. Supply constraints are underscored by a global semiconductor shortage, which reduces the production of motor vehicles as well as the production of electrical equipment, devices and components, raising prices and hurting sales of these products.

The component of wholesalers’ inventories that goes into the calculation of gross domestic product also increased 0.8%. Economists maintained their high estimates of second-quarter GDP growth, mostly in the double-digit area, but warned that supply chain bottlenecks were a downside risk.

Although inventories of motor vehicle wholesalers increased in April, they were down 3.3% year-on-year. Computer hardware inventories fell 1.1% in April.

Businesses reduced their inventories in the first quarter amid booming domestic demand. Lower inventories subtracted nearly three percentage points from GDP growth in the last quarter. Still, the economy grew at a robust annualized rate of 6.4% after growing at a 4.3% pace in the fourth quarter.

Wholesale sales rose 0.8% in April after accelerating 4.3% in March. At the pace of April sales, it would take 1.22 months for wholesalers to clear the shelves, unchanged from March. This is the shortest period since September 2014.

“This reflects strong demand as economies reopen, as well as constraints on inventory due to supply chain disruptions, microchip shortages and rising commodity costs,” said Mike. Englund, chief economist at Action Economics in Boulder, Colorado.

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