Inventory Data Hints at Summer Slowdown — and Main Street Merchant Markdowns

When goods pile up on shelves and in wholesale channels,  markdowns loom.

And among the latest spate of economic data, there are hints that a summer slowdown for many merchants may be in the offing.

As reported by the Census Bureau on Monday (April 10), U.S. wholesale inventories were up in February, where there had been a decline in January. The data shows the inventories of U.S. merchant wholesalers rose 0.1% in February compared with the previous month after declining 0.4% in January.

Delving into the details, the latest report shows seasonally adjusted inventories of apparel, as measured month over month, were up 2.4% vs. January. In January, apparel inventories were up 0.7%.  Alcohol inventories were up a respective 2.1% and 5%; among durable goods, the automotive businesses saw inventories swell by 0.5% and 1.7% month to month as measured in February and in January.

Importantly, the ratio of inventories to sale — a read-across of how many months that it takes to clear out that inventory — has proven volatile. That ratio barely budged, at 1.37 in February, down from 1.38 in January, but higher than the 1.24 in February 2022.

The wholesale inventories might be viewed as a harbinger of things to come: Wholesalers sell products in bulk, as goods end up on retailers’ shelves and on showroom floors. The merchants, of course, then sell the goods — whether a shirt or a case of wine — to end consumers.

The fact that we’re seeing a bit of buildup in wholesale channels hints that orders from at least some consumer-facing businesses may be slowing down. And that hints that the merchants have enough goods on their shelves — and indeed, are trying to get the shelves to be a little less crowded. Where there are shelves burdened with inventory that’s not moving, markdowns are in the offing.

Impact on Main Street

The impact may be most keenly felt by Main Street small and midsize businesses (SMBs). As detailed in the latest PYMNTS survey of these smaller firms that power the U.S. economy, retail SMBs are bracing for the worst — 65% say they believe a recession will begin in the next 12 months, 54% of food and drinking establishments say the same, and 43% of firms, overall, say inflation stands among their most significant challenges.

There are some indications that the credit crunch that’s taking shape will hamper the ability to buy inventory. It takes money to make money, as the saying goes, which in this case means that companies have to have capital on hand to run operations and buy the goods from wholesalers that ultimately line their shelves. A significant 44% of the retailers we’ve surveyed state that they have no financing available. Without financing on hand, they cannot buy the capital stock they need if demand materializes.

As for that demand — we’ll get more color on inventory and consumers’ appetite to spend as earnings season gets underway beginning this week. Separate PYMNTS reporting, here, shows a pullback in discretionary spending. Less than 20% of consumers in the middle-income bracket — those earning $50,000 to $100,000 annually — expect to purchase big-ticket electronics, clothing or gifts in 2023. And a full 69% of consumers queried by PYMNTS have been “trading down” to cheaper merchants.

The wholesalers may be signaling tougher times ahead for Main Street’s merchant mainstays.