US: Business Inventories

Thu Mar 12 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.1% -0.7% to 0.3% 0.0% 0.1% 0.0%

Inventories have been rising relative to sales and the build is not intentional, based on business inventories which were unchanged in both January and a revised December vs sizable declines in sales of 2.0 percent in January and 1.0 percent in December. The inventory-to-sales ratio is at 1.35 vs 1.33 in December and 1.31 in November.

Of the 3 components, retail, data on which were released today, shows an inventory-to-sales build to 1.44 vs December's 1.43. Builds are shown across most categories but, in an important positive, not autos where the ratio slipped slightly. However, this morning's retail sales report for February, which was mostly soft throughout including for autos, points to the risk of inventory builds in this report next month.

The other 2 components, in previously released data, show a very sharp build for the wholesale sector, to an inventory-to-sales ratio of 1.27 vs 1.22, and also the factory sector, to 1.36 from 1.34.

If it were not for jobs data which have been very strong, most other data, including inventory data, would be pointing to an economic soft patch. Note that unwanted inventories are a negative for both future production and hiring.

Market Consensus Before Announcement
Business inventories rose only 0.1 percent in December but business sales fell a very sharp 0.9 percent for a third straight decline. The inventory-to-sales ratio jumped 2 notches to 1.33 which is the heaviest reading since July 2009. All 3 components showed builds relative to sales especially retailers where inventories of apparel and building materials look heavy. Inventories of autos also look heavy -- especially given the latest contraction in the auto component of the January retail sales report.

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.