US: Business Inventories

Fri Jan 12 09:00:00 CST 2018

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change 0.3% 0.2% to 0.4% 0.4% -0.1% 0.0%

Inventories are rising but are not keeping pace with sales in what is very good news for the economy but not such good news for fourth-quarter GDP. Business inventories rose 0.4 percent in November with October revised 1 tenth higher to no change. Two months into the fourth quarter the inventory build is a bit slower than the build in the third quarter which will hold down GDP.

Sales surged 1.2 percent in November and follow October's 0.8 percent rise. These are very strong numbers that aren't being matched by inventories which is reflected in the inventory-to-sales ratio which is down a notch to 1.33. This is very lean and points to the need for restocking, and restocking in turn points to the need for production increases and hiring. This is a very positive setup going into 2018.

Wholesalers were the most active in November, building inventories by 0.8 percent following a sharp 0.4 percent draw in October. Inventories at manufacturers were up 0.4 percent and 0.3 percent in the two months with retail inventories flat, up 0.1 percent in November following no change in October.

Market Consensus Before Announcement
Business inventories have been rising in line with underlining sales though October did see a 0.1 percent draw. Forecasters are expecting a 0.3 percent build for November 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.