US: Business Inventories

January 13, 2017 09:00 CST

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.6% 0.1% to 0.7% 0.7% -0.2% -0.1%

Data on fourth-quarter inventories are looking heavy, up 0.7 percent in November in an offset to a revised 0.1 percent draw in October. Both retailers and wholesalers show large 1.0 percent builds in November with manufacturers at a 0.2 percent build. Given weakness in total sales, up only 0.1 percent, the stock-to-sales ratio rose 1 tenth in the month to 1.38.

Rising inventories are often a negative for future production and employment but they are a positive for GDP where the fourth-quarter calculation will get a lift from November's build. A tangible positive in the report is that half of the build among retailers was at auto dealers who, based on this morning's retail sales report, enjoyed very strong sales in December.

Market Consensus Before Announcement
Demand may be on the rise but inventories, based on advance data, appear to have risen sharply in November, raising the risk of an excessive build. Forecasters see business inventories rising 0.6 percent following October's 0.2 percent draw. High inventories are a plus for the GDP calculation but pose a risk to future production and employment.

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.