Wednesday, October 14, 2009

Good News Alert: Inventories Cliff Dive

Marketwatch details:

Paced by a large draw-down in autos, business inventories fell 1.5%, matching the largest percentage decline ever recorded in the 17-year history of the data. Inventories also fell 1.5% in December 2008 and in October 2001.

It was the 12th consecutive month of falling inventories. Read the full report.

Economists surveyed by MarketWatch were expecting a 1% drop in inventories. See Economic Calendar.

Meanwhile, sales increased 1% in August, which were also boosted by the government's cash-for-clunkers deal. The figures are not adjusted for price changes, but are adjusted for seasonal variations.

Inflation-adjusted business sales are one of four key indicators used to determine if the economy is in recession or expansion. The others are nonfarm payrolls, personal incomes, and industrial production
The good news is this sets up the "Mother of All Inventory Corrections" we've all been waiting for, but when? Well, inventories are at late 2005 levels (good for the inventory correction story), but sales are at early 2005 levels (not good for the inventory correction story).

My guess is that inventories continued to decline in September, but at some point the rebound (or even flattening in sales) will require a replenishment of inventories.

Source: Census


  1. Given the how slow sales growth is, does this suggest the inventory boost everyone is expecting in Q3 and Q4 will be minimal, at best? Furthermore, if sales remain tepid does that indicate the inventory correction will not be a one off big move, but slow and methodical like sale?

  2. i think that is a fair assessment on both accounts if sales remain sluggish.

  3. Saying this is "good news" is sort of like saying deaths from the plague are cliff diving. It is good news unless you also know that so is the population.

  4. FT & Jake - you might want to look at the I:S Ratio and notice a)that it's been rapidly declining for years until b) it surged to the moon recently (check out FREDII over at the STL Fed site).
    If sales stays in the doldrums businesses are not likely to boost inventories much and actually still have a ways to go to get back tot he I:S ratio they prefer!