The Census Bureau released business inventory data along with retail sales data this morning. Typically I don’t pay a huge amount of attention to inventory data, but there are business cycle theorists who argue that inventory imbalances drive recessions. The theory behind the argument is that when inventories grow faster than sales, it leads to an excess of inventory, which means that manufacturing of new products slows in order to allow inventory to be liquidated at low prices.
This kind of recession dynamic may have been more influential in a manufacturing driven economy than in today’s service driven economy. Still, I thought it was worth noting that the inventory to sales ratio has been rising somewhat as of late. In February it stood at 1.31 months of inventory, which is still very low by long term historical standards, but higher than it was a couple of years ago. (The inventory to sales ratio has tended to decline over time as industry has become increasingly service based and also has become more efficient with inventory management).
For the reasons mentioned above I wouldn’t say that a rising inventory to sales ratio is in and of itself a harbinger of recession, but it bears watching. Changes in inventory accumulation can still have big effects on reported GDP growth because of the quirks of the way the number is measured. When inventories go from accumulation to liquidation there is a big swing in the “investment” component of the reported growth number.
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