US: Business Inventories

Tue Sep 15 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.1% 0.0% to 0.5% 0.1% 0.8% 0.7%

The nation's inventories remain slightly on the heavy side, up an as-expected 0.1 percent in July vs a 0.1 percent gain in sales that leaves the stock-to-sales ratio at 1.36, substantially higher than 1.29 a year ago.

Retail inventories rose 0.6 percent in July with the build, however, centered in vehicles which is positive given the strength, evident in this morning's retail sales report, of strong consumer demand for vehicles. Excluding vehicles, retail inventories rose a manageable 0.2 percent. Building materials rose 0.6 percent which may be a problem given weakness for this component in the August retail sales report. The stock-to-sales ratio for retail is unchanged at 1.46.

Stock-to-sales ratios in the report's other two components, in previously released data, are also unchanged, at 1.35 for manufacturers and 1.30 for wholesalers.

Though a bit heavy, inventories right now don't look to be a make-or-break factor for production or employment.

Market Consensus Before Announcement
Inventory overhang, which is moderate, is expected to ease with business inventories forecast to rise only 0.1 percent in July. Prior data for the factory and wholesale sectors showed stable conditions in July.

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.