|Inventories - M/M change||0.2%||0.1% to 0.5%||0.4%||0.1%||0.1%|
Inventories are rising in line with sales, pointing to well-balanced strength for second-quarter GDP. Business inventories rose 0.4 percent in April, just below a strong 0.6 percent in business sales and leaving the stock-to-sales ratio unchanged at 1.36.
Of the report's three components, retail shows a slight imbalance with inventories jumping 0.8 percent against only a 0.1 percent rise in sales that lifts the sector's stock-to-sales ratio to 1.46 from 1.45. But this is likely to reverse in the May inventory report given the enormous strength in this morning's retail sales report for May.
Looking at the other two components, inventories at wholesalers are a little leaner than they had been, at a stock-to-sales ratio of 1.29 vs 1.30, while manufacturers are a little less lean, at 1.35 vs 1.34.
Sales weakness in the first quarter led to inventory overhang which is now being reversed in what will be a plus for both production and employment.
Market Consensus Before Announcement
Business inventories were rising relative to sales earlier in the year in what perhaps reflected the special problems of the first quarter (weather, port strike, energy sector weakness). Inventories are expected to rise 0.2 percent and if sales can exceed this rise, the combination would help ease overhang.
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.
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