US Business Inventories Remain Stable in April, Potential Impact on Second-Quarter GDP

The U.S. business inventories remained unchanged in April, with a decline in stocks at manufacturers, suggesting that inventories could be a drag on gross domestic product (GDP) in the second quarter. This follows a 0.1% gain in March, which was in line with economists' expectations. Inventories are a key component of GDP and increased 2.2% year-on-year. The most volatile component of GDP, inventories surged at an annualized rate of $163.0 billion in the first quarter as businesses stocked up ahead of President Donald Trump's tariffs on imported goods, adding 2.25 percentage points to GDP, the most since the fourth quarter of 2021. However, this contribution was eclipsed by a record 4.83 percentage point drag from a sharp widening in the trade deficit due to the flood of imports, resulting in GDP declining at a 0.2% rate last quarter - the first contraction in three years. With the front-running of imports ebbing, the trade gap has narrowed considerably so far in the second quarter, likely positioning GDP for a sharp rebound. However, inventories will decide the magnitude of the anticipated surge in GDP. The Atlanta Federal Reserve is currently estimating the economy growing at a 3.8% pace in the second quarter. Retail inventories were unchanged instead of dipping 0.1% as estimated in an advance report published last month. They fell 0.3% in March, while motor vehicle inventories decreased 0.8% rather than 0.9% as previously reported, dropping 1.5% in March. Retail inventories excluding autos, which go into the calculation of GDP, rose 0.3% as initially reported. Wholesale inventories gained 0.2% in April, while stocks at manufacturers fell 0.1%. Business sales dipped 0.1% after increasing 0.6% in March, and at April's sales pace, it would take 1.38 months for businesses to clear shelves, unchanged from March.