US: Business Inventories

Tue May 15 09:00:00 CDT 2018

Consensus Consensus Range Actual Previous
Inventories - M/M change 0.2% 0.1% to 0.6% 0.0% 0.6%

Business inventories came in lower than expected in March, at no change which is just below Econoday's low estimate. Retailer inventories fell 0.5 percent in the month which is 1 tenth below the advance estimate and a reflection of that month's rebound in retail sales which drew products off shelves. Wholesaler inventories rose 0.3 percent, which matches the advance release, while factory inventories also rose 0.3 percent and in line with the previously released factory orders report. A plus in today's report is that total sales growth, at 0.5 percent, was healthy and pulled down the inventory-to-sales ratio to a leaner 1.34 from 1.35.

Today's report will trim back inventory contribution to the second estimate of first-quarter GDP but will be offset by this morning's upward revisions to March and February retail sales which will help improve the contribution from consumer spending. For the second quarter, today's report points to healthy conditions for the nation's inventories which are ready to rise to meet continued strength in underlying demand.

Market Consensus Before Announcement
A modest 0.2 percent rise is the consensus for March business inventories, a build that would be under sales growth which has been slightly ahead of inventories. An unexpected reading in this report, whether high or low, could effect expectations for the second estimate of first-quarter GDP which, in the first estimate, got a sizable lift from 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.

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.