US: Business Inventories

Wed Feb 14 09:00:00 CST 2018

Consensus Consensus Range Actual Previous
Inventories - M/M change 0.3% -0.3% to 0.4% 0.4% 0.4%

Business inventories came in as expected in December, up 0.4 percent with November unrevised and also at 0.4 percent and with October unrevised at no change.

December's build was centered among manufacturers where inventories rose 0.5 percent and also wholesalers at 0.4 percent. Retailers held down the total, up 0.2 percent for the fourth straight soft reading. Retail inventories are low but given the softness and downward revisions to this morning's retail sales data, the need to build these inventories doesn't appear to be urgent.

The build in inventories slowed in the fourth quarter and the question now, given the flatness of the retail sector, is how much businesses will need to increase their stocks in the first quarter, an answer that will have direct consequences on the quarter's production and employment.

Market Consensus Before Announcement
Forecasters are calling for a moderate 0.3 percent build for December business inventories, data that will be an input into the second estimate for fourth-quarter GDP.

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.