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. Why Investors Care
| Released on 7/15/08 For May 2008 | ||||||||||||
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Highlights
Inventories are well positioned for slower economic growth in the second half, at least based on May's mix of business inventory and sales data that show an overall stock-to-sales ratio of 1.24, down 1 tenth from April and matching the record low set late last year. The report's main headline, business inventories, rose 0.3 percent in May, down from a 0.5 percent rise in April and well below a 0.8 percent rise in business sales for the month. Year-on-year, inventories are up 5.2 percent, again below the sales rate of 6.6 percent.
Retail data are the new information in today's report, showing a welcome 0.2 percent draw down with ex-auto down 0.1 percent and auto dealers down 0.6 percent. All good news especially given this morning's not soft -- but still not very strong -- retail sales report for June. The likelihood that retail sales will slow as tax rebate checks fade out make it essential that retailers keep their inventories in check.
A 0.8 percent inventory rise at wholesalers and a 0.5 percent rise at factories were both previously released and are both on the high side. But in total, the risk of inventory overhang, which can decimate jobs in a sector, seems only marginal at this point.
Business inventories are signaling a pickup in demand as inventories posted a 0.5 percent gain in April. Retailer inventories rose 0.4 percent, nearly reversing a 0.6 decline in March. Retailer inventories may have to climb further given strong retail sales in both April and May. But it is a tough balancing act for businesses as the outlook for consumer demand is so uncertain - consumers may retrench after the income tax rebate checks run out.
Business inventories Consensus Forecast for May 08: +0.4 percent
Range: +0.4 to +0.6 percent
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Inventories tend to rise when economic conditions are strong; since sales are rising at the same time, the inventory-to-sales ratio may remain stable, or rise at a very slow pace. Inventories tend to drop when economic conditions are weak; since sales are falling at the same time, the inventory-to-sales ratio may remain relatively stable. The I-S ratio then begins to rise as sales fall more quickly than inventory growth. |
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