Total business inventories continued to fall in September by 0.4%, less than the 0.7% decline economists were expecting, the Commerce Department reported today. September now marks the thirteenth consecutive month of inventory declines, the longest streak since the 15 months ending April 2002. Total business inventories are 13.4% lower compared to August 2008.Marketwatch explains how inventory correction works its way through to final output figures:
Total business sales fell 0.3% in the month, breaking the three-month streak of growth. The decline can be attributed to a 2.6% decrease in retail sales, reflecting a 14.3% decline in auto sales. All other major types of retail stores experienced sales gains of less than 1% except for building material stores whose sales decreased by 0.6%. Manufacturing sales and wholesale sale rose 0.85 and 0.6% respectively.
Once businesses reduce their inventories to desired levels, any increase in sales will have to come from new production, which would boost both U.S. jobs growth and imports.But unfortunately, the trend of a continued declining inventory to sales ratio was not in the cards for September.
The inventories report typically receives little attention from investors, but the pace of inventory reduction will be at the heart of any economic recovery this year. Most economists believe inventories will continue to be cut for several quarters before general restocking is needed.
While this is only one data point, without sales growing faster than inventories, we won't get the mother of all inventory corrections many (I included) expect.
Source: Census
Jake, we are getting the mother of all inventory corrections. It's just not leading to a big drop in sales to inventories because it is due in large part to a drop in sales. That was always the problem, wasn't it?
ReplyDeleteEd- sorry for the LONG delay in getting back to you (real work ain't fun... especially when on the road for a full week).
ReplyDeleteAnyhow, you mention that the drop in sales is causing inventories to sales ratio to remain flat, but that's my point?
An inventory correction only happens when a company needs to replace inventory that they let drop below normal levels. Maybe (unlikely, but this is my point) at the end of the day businesses don't "correct" inventory levels (i.e. rebuild them) and those that survive are 'just in time' type companies. In that case we don't get a massive jump due to the renormalization of sales + the inventory rebuild.