Tuesday, March 13, 2012

The Inventory/Sales Ratio: A Little-Discussed Number

The Lehmann Letter (SM)

Last month this letter observed that businesses' robust and steady inventory build-up was another sign of a strengthening recovery. More goods on the shelf signal an optimistic sales outlook for the months ahead.

Now let's examine the relationship between inventories and sales. How does it compare with historical experience?

The chart shows that the ratio has fallen over the past 20 years as businesses' drive for efficiency has enabled them to expand sales with a smaller proportion of goods on the shelf. A smaller inventories/sales ratio means that sales have grown more rapidly than inventories.

Focusing on the most recent years, the ratio remained below 1.3 except for the recession-spike.

Inventory/Sales Ratio
(Click on chart to enlarge)

(Recessions shaded)

Today's report from the Census Bureau shows no divergence:


In January, the latest available month, inventories were 1.27 times larger than sales. This fits the trend of normal, steady growth for both inventories and sales.

It's a good sign.

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

© 2012 Michael B. Lehman

No comments: