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Capacity Utilization Shows Inventory Reduction Goosed Retail Sales
By: Brian Kelly   Tuesday, March 17, 2009 4:05 PM

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Retail sales in February jumped more than expected last week. The sectors that contributed to that increase were electronics, furniture and clothing. Since each of these sectors is attributed to discretionary spending it was encouraging that consumers had begun to spend again. The following charts illustrate the divergence from the three month trend for each of the contributing sectors.

One possible explanation for the uptick in retail sales was that retailers finally found the discounted price that attracted consumers. Moreover, the previous 3 months that the 3 month trend is calculated from, included the weak holiday season and the heavy inventory discounting that usually occurs in January and February. The test of this hypothesis would come with the release of industrial production and capacity utilization. If retailers felt the increase in sales was sustainable they would order more product, resulting in an increased capacity utilization at manufacturers.

On Monday, capacity utilization was released and without exception, capacity utilization decreased for every sector that showed increased retail sales. The implication is the sales that retailers experienced were not enough to warrant new orders. As speculated, it was simply a matter of reducing inventory to match reduced demand.

Disclosure: I am short RTH.


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