|Inventories - M/M change||0.0%||0.0% to 0.3%||0.3%||0.0%||0.1%|
Business inventories rose a higher-than-expected 0.3 percent in September on a back-up of inventories in the retail sector. The build is a plus for third-quarter GDP revisions but may not be a plus for future production and employment.
Retail inventories surged 0.8 percent in September while sales came in flat, in turn raising the inventory-to-sales ratio to 1.48 from 1.47 for the highest of the recovery. Ratios across most retail subcomponents moved incrementally higher.
This report's other two components, which were previously released, include a 0.4 percent decline for factory inventories and a 0.5 percent rise for wholesales inventories.
Had this morning's retail sales report for October proved stronger, the September build for retail inventories would be no concern. But the October sales report proved soft, raising the risk that retailers may be over-estimating holiday demand.
Market Consensus Before Announcement
Business inventories are expected to come in unchanged in September after showing no change in August. But relative to sales, which fell 0.6 percent, inventories in August turned higher with the inventory-to-sales ratio at 1.37 from 1.36 in July and compared with 1.30 in August last year. Inventories, though showing little absolute change, are nevertheless heavy and risk slowing production and employment growth.
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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