US: Business Inventories

Thu Feb 12 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.2% -0.2% to 0.4% 0.1% 0.2% 0.2%

A mismatch between inventories and sales is appearing in what could be a negative for production and employment. Business inventories rose only 0.1 percent in December but business sales fell a very sharp 0.9 percent for a 3rd straight decline. The inventory-to-sales ratio jumped 2 notches to 1.33 which is the heaviest reading since July 2009.

All 3 components show builds relative to sales especially retailers where inventories of apparel and building materials look heavy. Inventories of autos also look heavy -- especially given this morning's contraction in the auto component of the January retail sales report.

Small inventory builds are typically welcome news but not when sales are down. Still, strong business outlooks in many reports point to expectations of sales growth ahead, growth that in turn would help keep inventories down.

Market Consensus Before Announcement
Business inventories growth 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 that month's weakness in retail sales, 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.

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.