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Economy in Brief

Inventories Tell the Story of a Real Upturn in Progress
by Robert Brusca  March 15, 2017

Rarely do inventory data ever tell a clearer story of an upturn in progress than they do in January 2017. The chart tells the first story. Sales are accelerating sharply. The growth in sales surges to and past the growth rate of inventories. Sales switch from falling and being weaker than inventory growth (a configuration that causes unwanted inventories to pile up) to a situation in which stocks of product cannot be built fast enough to keep in step with sales. And sales growth has stepped up as has inventory growth but at a lesser pace. As a result, we see inventory growth as 'chasing' sales in all three principle sectors. This is a highly stimulative situation for the economy.

Not only are business sales accelerating but business sales are accelerating from one ago to the last 12-months to last six-months to the last three-months. As time horizons shorten and become more up to date, the growth of sales picks up for (1) total business sales (2) manufacturers' sales, (3) retailers' sales, and (4) wholesalers' sales. That is an impressive set of results.

We see similar sequential patterns are in play for inventories on those same timelines for these same sectors inventory growth rates are progressively stepping up just as they do for sales (retailing has one minor backtracking for three-month to six-month).

For each sector, we see both sales and inventories on impressively accelerating growth paths. Moreover, except for the 12-month ago period when the economy was still slowing down and when inventories grew faster than sales (causing inventory-to-sales ratios to rise), we see that sales continue to grow faster than inventories for all sectors on all horizons.

To recap, both sales and inventories are growing. Both series are accelerating. But sales are growing faster than inventories, a configuration that depresses inventory-to-sales ratios and generally leads to higher new orders stimulating U.S. industrial output and U.S. imports. In addition, we see these trends are in progress overall as well as across all three major industry sectors. There is nothing here not to like.

You simply do not find a pirate map that says 'X' marks the spot where the hidden treasure in buried nor do you see a batch of economic data that so clearly point to a situation of strong growth in progress. If there is something not-to-like in this report, it is that despite all the trends I have identified, in retailing inventory growth is nearly at a parity with sales growth over three-months; that implies that much of the catch-up for inventory-building may have been achieved already. That fits with the observation that imports have picked up and have been growing strongly for a several months running. Of course, strong imports do not add to U.S. growth; they subtract from it.

Still, the picture from inventories is quite clear. The growth gap over three-months may have been partly closed for retailers, but for manufacturers and wholesalers inventory building still lags well behind sales growth rates. With inventory-to-sales ratios assessed from January 2011 onward, we find that the overall inventory-to-sales ratio (I-to-S) has been higher 33% of the time. In retailing it has been higher only 21% of the time, in wholesaling it has been higher 33% of the time, and in manufacturing it has been higher 41% of the time. All of these I-to-S ratios are only at moderately firm levels. With sales advancing strongly, the likelihood is that merchants will be not just chasing the pace of sales but trying to get ahead to boost the inventory-to-sales ratio with sales growth so robust. This is a very dynamic and positive signal from the inventory report.

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