Friday, September 10, 2010

Strong Sales

The Lehmann Letter (SM)

Today the Census Bureau reported strong sales gains across a broad swath of American industries:

That's good news for our economy's recovery.

Businesses also continued to rebuild inventories while they maintained a low inventory/sales ratio. That's also encouraging because it reverses a development that dragged us into recession.

Here's why. Manufacturers' sales collapsed as the recession took hold. To make matters worse, inventories of unsold goods piled up on their shelves. The inventories/sales ratio climbed as sales plunged and inventories rose. Manufacturers brought the situation under control by slashing production by an amount greater than the sales drop, thereby bringing the inventories/sales ratio back down to normal levels. That was an important cause for the economy's rapid descent into recession and the equally rapid rise in unemployment.

Businesses did not resume strong manufacturing production until they had liquidated excess inventories. Today's report shows that this process is continuing as sales and inventories build once again while the inventories/sales ratio remains low after the inventory work off. This reversal of inventory liquidation, and the consequent rebound of manufacturing production, is an important ingredient in the economy's recovery.

But it won't be sufficient for a complete comeback or for the return of full employment. That will require stronger signs of life in demand for new housing and autos. Let's keep our fingers crossed.

© 2010 Michael B. Lehmann

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