US: Business Inventories

Thu Sep 15 09:00:00 CDT 2016

Consensus Consensus Range Actual Previous
Inventories - M/M change 0.1% -0.1% to 0.2% 0.0% 0.2%

Inventories were unchanged in lagging data for July while sales retreated 0.2 percent. The stock-to-sales ratio was unchanged at 1.39. Retail inventories fell 0.3 percent with auto inventories down 0.2 percent. Wholesale inventories were unchanged in July while inventories at manufacturers, a sector where demand is soft, edged up 0.1 percent.

An outright drop in inventory investment subtracted almost 1.3 percentage points from second quarter GDP growth -- the largest drag in more than two years. Inventories have weighed on GDP growth since the second quarter of 2015. Expectations are for inventory accumulation to rebound in the third quarter adding to GDP growth.

Market Consensus Before Announcement
Tight management has been keeping in check business inventories which are now becoming leaner as the economic pace picks up. Retail demand is the central factor for inventories and as long as retail sales remain solid, the risk of inventory overhang is limited.

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.