While last Friday’s jobs report had a decent headline number (if little else), the wholesale report is nothing but trouble. Start with wholesale sales, down 1.2% from September on an adjusted basis, while inventories rose 0.5%. Automobile sales fell 3.1%, dragging durable goods sales 0.9% lower on the month. Even nondurable goods had a difficult month, largely due to petroleum sales (-5.7%), alcohol sales (-1.6%) and clothing or apparel (-3.3%).

The nondurable portion of the sales half of the report is particularly worrisome in that lower prices should translate into more purchasing activity, particularly in energy products such as gasoline, but deliveries and inventory builds suggest that end demand is simply not there.

While the sales portion of the report was weak and worrisome, the inventory half was downright troubling. At the wholesale level, sales have been outside of the “cyclical” trend since April. The summer “swoon” was at first matched by inventories, but since then inventories have been far outpacing sales by a large margin. Producers clearly believed that the summer slowdown would be as temporary as had been in both 2010 & 2011, but 2012 has been different.

As a result, the very important macro indications of inventory-to-sales ratios are at “cycle” and multi-year highs.

Outside of the Great Recession, we have not seen an inventory-to-sales ratio of 1.22 since November 2006, just before the initial downward move into recession. In the durable goods space, we have not seen an inventory-to-sales ratio of 1.61 since 2003 during the last days of the dot-com machinery firesale.

The dramatic increase in the ratio is completely contained within the last seven months. Inventory levels have been much better managed in nondurable goods, keeping pace with lackluster sales. Durable goods producers, however, have been adding inventory at remarkable rates and in key economic sectors.

Motor vehicles inventories, for example, have risen 5.4% in the twelve months ended October 2012, but sales grew 9.1%. The rise in inventory-to-sales has been much more recent, as motor vehicle sales fell in October, noted above, while inventories rose 0.4%.

Other durable goods segments have not held the line in linking sales and inventories, however. In the machinery, equipment & supplies segment (basically capex-type spending), inventories have gained almost 20% in the twelve months ended in October 2012. Sales over that same period rose only 1%.

In the metals & minerals segment (basically commodities ex petroleum), again we see the same problem. Inventories rise 9.3% over the year, but sales actually declined 2%. In the “other” durable goods category, inventories grew by 4.1% but sales fell by a drastic 10.3%.

The “commodity” category now shows an inventory-to-sales ratio far above the pre-crisis historical record. The ratio had never been above 2.0 until September 2008, and looked like it was heading back to more historical norms (around 1.7 – 1.8) until this year. That suggests that warehoused commodity stocks are historically elevated to end user demand.

In the pure capex segment of machinery & equipment, the parabolic spike in the inventory-to-sale ratio since early 2012 matches the weakening/contracting capex picture painted by so many other data points and series. The historic high here, however, puts a new level of urgency on the weak data. We are now at levels not seen (again, outside the Great Recession contraction period) since the “dot-com economy” fell apart.

Inventory levels have historically been one of the primary triggers of economic contraction, particularly as those levels diverge dramatically from actual sales. The fact that such inventory asymmetry is occurring in segments that are both leading macro indications and primary measures of business investment appetite is indicative of active business retrenchment (as opposed to just sentiment). The knee-jerk reaction will be to blame the fiscal “cliff”, but the weakness in nondurable goods, particularly energy, suggests that this is more than businesses angling ahead of taxation changes, and instead speaks to end users without sufficient income to maintain even economic “stall speed”.

On the global trade front, the “bump” from September has, like so many other data series, dissipated after only one month. October exports fell a rather large 3.6% or $6.8 billion. Imports also declined (weak end user demand) but by a smaller magnitude, down 2.2% or $4.9 billion. For GDP accounting, that is a net negative since imports fell less than exports.

Aside from the vagaries of statistical agencies, these figures again re-establish the downward trend that began in the March/April period.

The decline in exports month-over-month was broad-based and extended to all sub-segments except a small increase in “other” goods. The largest month-to-month decline in import activity occurred in “consumer goods”, coinciding with renewed declines in real disposable income.

Despite “headline” improvement in employment reports, underlying data across a broad and, more importantly, broadening slice of the real economy is moving in the wrong direction. Worse, movement in that wrong direction is accelerating and in many places reaching historical comparisons that indicated not just contraction, but something more than a temporary setback. These pieces of empirical data are not just showing trend changes, they are flashing dramatic warnings that malaise and muddle have changed to something more sinister.

If I had to wager, given all the recent data underneath the adjusted headlines, I would bet that eight or nine months from now the NBER will assign October 2012 as the official start of the re-recession in the US (with an outside chance that they look to August 2012 for the genesis). At the very least, it is almost incontrovertible that 2012 is nothing like 2010 or 2011, despite the fact that both those previous years were underwhelming in their own right.

The divergence between adjusted headlines and the gathering storm is simple statistical theory. It’s the same reason that economists can never and will never predict an inflection point. Economic expectations and predictions are based on assumptions about, more than anything, trend cycle and the recency bias that cycles are an inherent and inseparable feature of any economic system. This flawed assumption explains not only the lack of predictive value in economists’ estimates, but also the widening gulf between adjusted data releases and the underlying data. This dichotomy also occurred in the 2007/08 period as economists, including those residing inside the Federal Reserve, were convinced of nothing more than a slowdown as late as the summer of 2008.

I will have another post on this topic, but perhaps the only real cycle here is the fact that the economics profession continues to get the economic “cycle” wrong. That is why it takes the NBER nearly a year to figure out what has already occurred.