US: Business Inventories

Wed Jan 14 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.3% 0.1% to 0.5% 0.2% 0.2% 0.2%

Growth in business inventories was modest in November, up 0.2 percent for a second straight month, and was steady relative to sales which fell 0.2 percent following a 0.3 percent decline in October. The stock-to-sales ratio was a moderate 1.31 in both months.

A look at components shows a 0.3 percent inventory decline at retailers, a draw that may not be repeated in December given the weakness in retail sales posted earlier this morning, weakness that points to a build for retail inventories. Inventories at factories were little changed in November, up 0.1 percent, while inventories at wholesalers rose a sharp 0.8 percent in what appears to have been an unwanted build given a 0.3 percent decline in wholesale sales.

But inventory imbalance is not a major risk right now for the economy where growth, despite spots of disappointment, remains solid as evidenced by last week's employment report. Inventory imbalance for oil, however, is a major risk right now for the energy sector where supply is very heavy. Watch for the weekly petroleum inventory report later this morning at 10:30 a.m. ET.

Market Consensus Before Announcement
Business inventories rose slightly in October, up 0.2 percent, but showed no significant change relative to business sales which slipped 0.1 percent. The stock-to-sales ratio was unchanged for a 3rd straight month at 1.30. Looking at components, inventories at retailers rose 0.2 percent in October versus a 0.4 percent rise for sales. Here too the inventory-to-sales ratio is unchanged, at 1.42 for this component. The inventory-to-sales ratios for the two other components, wholesalers and manufacturers, also showed little change with wholesalers at 1.19 for a 3rd month and manufacturers at 1.31 versus 1.30 in September and August.

Business inventories are the dollar amount of inventories held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity. (Bureau of the Census)

Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth that won't generate inflationary pressures.

Rising inventories can be an indication of business optimism that sales will be growing in the coming months. By looking at the ratio of inventories to sales, investors can see whether production demands will expand or contract in the near future. For example, if inventory growth lags sales growth, then manufacturers will have to boost production lest commodity shortages occur. On the other hand, if unintended inventory accumulation occurs (that is, sales do not meet expectations), then production will probably have to slow while those inventories are worked down. In this manner, the business inventory data provide a valuable forward-looking tool for tracking the economy.