US: Business Inventories

Wed May 13 09:00:00 CDT 2015

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

Business inventories don't look quite as bloated after a small 0.1 percent gain in March that is under the 0.4 percent gain in business sales, taking the stock-to-sales ratio down to 1.36 from February's recovery high of 1.37.

The improvement in March is centered, however, in the retail sector where, thanks to that month's surge in sales, the stock-to-sales ratio slipped to 1.46 from 1.47. Whether further improvement can be expected in April is uncertain given this morning's disappointing retail sales report.

The stock-to-sales ratios for the report's two other components were unchanged, at 1.35 for manufacturers and at 1.30 for wholesalers.

Inventory overhang, built up during the slow first quarter, is widely seen as a risk for second-quarter growth, though this report suggests that the inventory headwind may not be that severe. Today's data follow yesterday's small business optimism report where inventory readings were surprisingly low.

Market Consensus Before Announcement
Business inventories have been looking increasingly heavy relative to business sales with unwanted inventories centered in the wholesale sector. But forecasters see a let up in March, with inventory growth, at a consensus plus 0.2 percent, under sales growth which is seen at plus 0.7 percent. An easing in inventory overhang would be a solid plus for the economic outlook.

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.