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Economy in Brief

Inventories rose by a small amount in January 2007. The monthly rise of 0.2% was mostly accounted for by a sharp increase in wholesale inventories that rose by 0.7%. Retail inventories rose by 0.2% and manufacturing inventories fell by 0.2%.

The first thing we see in inventory trends is that inventories have stopped the increase in their rate of growth. Inventories are still growing. But Yr/Yr growth rates have either stabilized or declined. For wholesalers the pace seems to have declined, whereas for manufacturers and retailers the pace of growth has been cut.  This is largely because sales have slowed (see next chart).

In this chart we see Yr/Yr growth plots of sales by sector. Sales growth rates are sliding across all sectors but the slide has halted for wholesalers, who also have stopped cutting their growth rate for inventories, as we saw above.Adequacy of inventory growth. To assess inventories I like to look at a growth rates for inventories Vs sales. I will show some of the more conventional I:S ratios for retailing later, but as an overview the growth rates when paired are important way to get a fix on what is going on with the dynamic interplay between inventories and sales.  I:S ratios only show a relationship that is static. While we can compare the static ratios of today to past static relationships it does not give any idea how inventories are shifting relative to sales. The chart above does that. It looks at different time horizons comparing by sectors inventory growth rates to sales growth rates. And while (as we saw already) Yr/Yr growth rates show all inventory rates of growth reside above their respective sales rates of growth, over the three month horizon, sales growth exceeds inventory growth – as of January, at least. Over six-months, wholesale sales growth still exceeds wholesale inventory growth. And, while inventories in each sector outgrow sales Yr/Yr just a year before that (see table) the opposite was true. What this chart demonstrates is how the current inventory imbalance is probably minor. The Yr/Yr growth imbalances are worst for manufacturers where Yr/Yr sales are actually lower with inventories growing at 5.7% pace. And over the last three-months it is clear that –whatever the I:S ratio  -- the imbalance between inventories and sales is being repaired by relatively faster sales growth across the board.  Retailing.  Here we present just the I:S table for retail sectors. To the right we show the position of the I:S ratio in its own range of values over the past 5 years, expressing the current value as a percentile of the range. A value of 100% would be the greatest I:S ratio of the period while 0 % would be the weakest. The low percentile readings suggest that retailers are by and large ready to rebuild inventories.  Clothing is an exception and autos are mid-range.
Supplement this chart with the dynamic retail growth chart on paired growth rates and we can be more constructive on the outlook…   The sector-paired growth rates show that for retailing in January, 3-month growth rates of sales generally exceed those for inventories. Over six months the trend is split. Over 12-months inventories are mostly growing faster, but not by large margins (clothing excepted). And again one year ago in January of 2006 sales outpaced inventories by a substantial margin across the board. That tells us the inventory overload is a recent and short term phenomenon.The question for inventories then is not ‘Are they lean enough to call for rebuilding?” Clearly they are. The real question is how retailers, wholesalers and manufacturers see sales prospects. The flat retail sales growth rates in January and February are a problem in that regard. If retailers judge the problem to be weather-related they may build stocks anyway. It’s their call. That’s why they get paid the Big Bucks.
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