US: Business Inventories

Tue Jul 14 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.2% 0.1% to 0.5% 0.3% 0.4% 0.4%

Business inventories, up 0.3 percent, rose modestly in May in line with sales which rose 0.4 percent. The stocks-to-sales ratio held unchanged at 1.36. Components show no builds for either factory or retail, which is a plus given softness in both sectors, but a large 0.8 percent build for wholesalers where however sales were strong enough to keep the sector's stock-to-sales ratio unchanged.

A modest inventory build isn't a plus for the second-quarter GDP calculation but is a plus for the production and employment outlooks which benefit from lean inventories.

Market Consensus Before Announcement
After an unwanted build during the disruptions of the first quarter, business inventories have stabilized this quarter and have been rising in line with business sales. A modest 0.2 percent rise in inventories is expected for May.

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.