US: Business Inventories

Tue Apr 14 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.2% 0.2% to 0.3% 0.3% 0.0% 0.0%

After bulging out late last year and in January this year, business inventory growth did not exceed sales growth in February. Inventories rose 0.3 percent, in line relative to sales and keeping the stock-to-sales ratio unchanged at 1.36. Still, 1.36 is by far the fattest reading since July 2009.

There has been one noticeable weak point and that's a further decline in sales at wholesalers, a drop that has been inflating the sector's inventories. But troubles in wholesale eased somewhat in February and this morning's strong retail sales results point to healthier wholesaler results for March.

Inventory growth may add to first-quarter GDP estimates but much of the build was unwanted, the result of weakness in underlying sales. High inventories do not encourage companies to expand or hire, no doubt a factor in the weakness of the March employment report.

Market Consensus Before Announcement
Business inventories 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.

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.