Tuesday, November 15, 2011

No Sign of Double Dip

The Lehmann Letter (SM)

This morning the Commerce Department released its September report on business sales and inventories:


Sales grew slightly while inventories hardly changed. Consequently the inventory/sales ratio remained unchanged at 1.27.

Inventory/Sales Ratio

(Click on chart to enlarge)

(Recessions shaded)

You can see the spike in the inventories/sales ratio during the recent recession. When a sales decline surprises businesses, unsold goods pile up in inventories. As sales drop and inventories climb, the inventory/sales ratio rises.

No business wants inventories to rise as sales fall. Businesses sell goods out of inventories in order to deplete stocks they no longer need. Production drops and the economy is gripped by recession.

You can see from the chart that the crisis is well behind us. The inventories/sales ratio has fallen back to normal as businesses liquidated their inventories and sales began to recover. Once sales growth resumed, businesses could begin to replenish their inventories.

Now both inventories and sales are back to where they were before recession hit, and both continue to grow. That's a good sign and can be taken as an omen that a new recession is not around the corner.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

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