US: Business Inventories

Wed Nov 15 09:00:00 CST 2017

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.1% 0.0% to 0.4% 0.0% 0.7% 0.6%

Business inventories were unchanged in September while sales however, tied largely to hurricane effects at the retail level, surged 1.4 percent. The mismatch pulls the inventory-to-sales ratio down 2 notches to 1.36 vs a long run at 1.38 and compared against a fat looking 1.40 in September last year.

With retail sales surging 2.1 percent in this report, retail inventories are especially lean, down 0.9 percent and largely reflecting autos where inventories fell 2.4 percent during the post-hurricane replacement surge of September. Wholesale inventories rose 0.3 percent in the month. against a 1.3 percent jump in sales, with manufacturer inventories up 0.7 percent against a 0.8 percent sales rise.

The lack of auto inventories among retailers will filter back through both the wholesale and manufacturing sectors which will have to rebuild their auto inventories. But autos are only one factor. The general need to build inventory to meet demand looks to be an increasing strength for the economy.

Market Consensus Before Announcement
Business inventories have been climbing in line with the solid pace of economic growth. But after August's exceptionally strong 0.7 percent build, inventories in September are expected to rise only 0.1 percent.

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.