US: Business Inventories

Thu Dec 14 09:00:00 CST 2017

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

The economic pace has been building but not inventories which are growing comparatively thin. Business inventories fell 0.1 percent in October against what is a very strong 0.6 percent rise in sales. The mismatch pulls the inventories-to-sales ratio down to 1.35 from 1.36 in September and 1.38 in August.

Retailers, enjoying strong sales, weren't able to add to inventories which were unchanged in the month. But the imbalance is isolated to vehicle dealerships where inventories fell 0.7 percent and excluding which retail inventories actually rose 0.4 percent.

Manufacturers added 0.2 percent to their inventories but wholesalers, the middle-man in the economy, show a sharp draw, down 0.5 percent in October which underscores the strong pace of overall demand.

Low inventories will help keep prices firm which, though a negative for holiday shoppers looking for bargains, is a plus for Federal Reserve policy makers who are hoping that inflation will begin to show some lift. But for employment and production, low inventories and the need for restocking are clear pluses. One last note, however, is that inventory draws are a negative in the GDP calculation and today's report will shave a little from what otherwise look to be rising estimates for fourth-quarter growth.

Market Consensus Before Announcement
Business inventories have been climbing solidly in line with underlining sales but are expected to ease back in October. Lower inventories during a time of rising economic demand point to the need for restocking and are a plus for employment and production. Forecasters see a 0.1 percent draw for October inventories.

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.