Thursday, May 14, 2009

Inventory Bright Spot

The Lehmann Letter ©

Yesterday the Census Bureau released March data for business sales, inventories and the inventory/sales ratio:

You can see that the inventory/sales ratio has stabilized at about 1.45 after rising from around 1.25.

(Click on chart to enlarge.)

Both sales and inventories continue to fall, but at last business has been able to reduce inventories more than sales. That has stopped the ratio’s rise.

Business doesn’t want a higher-than-necessary ratio of inventories to sales because business doesn’t want to tie-up cash in goods on the shelf. Business would rather run lean and put its cash to better use.

The rising ratio indicated that sales were falling so rapidly that business inadvertently wound up with more goods than required. A stable and falling ratio is a sign that business has brought its inventories under control.

That had to occur for business to stop cutting production. Why produce more if inventories are currently excessive?

The stabilizing inventory/sales ratio may be an omen that production will soon stop falling.

© 2009 Michael B. Lehmann

1 comment:

Daddio said...

Dr. Lehmann: Loved your charts in the 5/17/09 Chron. They would be more helpful to me if the charts were normalized. Examples; (new home sales)/population, (household business borrowing) x inflation/GDP, (federal borrowing) x inflation/GDP. For those indicators expected to grow exponentially it might be nice to have log normal plots. Also need to label the y-axis better. Are these number per month, quarter, year? Some total numbers are nice too: total real consumer debt, real national debt/GDP. In any case we own too much junk. Buying more doesn't fix it. Got to go take the stuff I bought at the garage sale to Public Storage. Bye.