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Economy in Brief

Sales Trim Losses As Inventories Are Looking Lean
by Robert Brusca September 15, 2009

Inventories fell again in the current month. Still the 1% drop while large is the smallest drop in eight months. Inventories average a 1.3% monthly decline in Q2 so in Q4 inventories are improving by 30% over the previous quarter.

The inventory conundrum - For the impact on GDP, it is not the change in inventory levels that matters but the change in the change. If inventories fall by the same amount in each month of Q2 and in Q3 the change in inventory investment will be zero (the same amount of investment in each quarter). The fact that inventories are falling by less in Q3 is the key to seeing there is a boost in GDP in the offing even though inventories are still falling. Right now the average drop per month in Q3 is $13bln compared to a drop of $18bln in Q2. Annualize that difference and you get a large swing. Still you still have to inflation-adjust those numbers and remember, it is only one month in the new quarter. But you get the picture. Inventories are a positive factor already.

I to S ratio is LOW - In the table above we show the percentile standing of the I-to-S ratio in its three-year range. For retailers it is the lowest inventory-to-sales ratio in three years. Wholesalers have inventories at a mid range mark, while for manufacturers inventories are still in the top 22% of their three year range (78th percentile) relative to sales.

Sequential growth trend is your friend-- The sequential growth rates show that the pace of sales has moved from the negative to the positive from 12-months to six-months to 3-months across manufacturers, retailers and wholesalers. This is good news. The pace of inventory declines for the most part seems to have plateaued as three month growth rates are even with six month growth rates for the major business sectors.

The end of days…the dog days -- Despite the fact that inventories are still declining you cans see the whites of the business expansion’s eyes. The end of recession is at hand; the start of recovery is in play. Sales are on an upswing across sectors the I-to-S ratios are mostly low and the pace of the inventory decline is flattening out. These facts should make inventories a positive factor for growth in Q3 and could make them a powerful factor for Q4 growth as well. Remember that inventories are still falling and the rebuilding process has not yet begun, so this switch powered eventually by inventory growth, not just slower paring, could go on for some time.

2009.Jul Inventory and Sales Paired Growth Rates by Major Divisions
  Sales Inventory Sales Inventory Sales Inventory Sales Inventory %-tile
Total Business 4.7% -13.6% -1.9% -14.2% -17.8% -11.8% 7.9% 6.7% 52.4%
Manufacturers 3.8% -10.0% -3.6% -11.8% -22.2% -10.0% 7.1% 7.8% 78.6%
Retailers 5.5% -14.6% 0.2% -13.9% -9.5% -12.9% 1.5% 2.2% 0.0%
Wholesalers 5.0% -17.0% -2.0% -17.4% -19.8% -12.8% 15.2% 11.0% 52.2%
Ratio of STOCKS to Sales; Stocks Vs Flows
Inventory-to-Sales Ratios In Perspective Over three Years
2009.Jul Current 3Mo
%-tile Max Min
Total Business 1.36 1.43 1.46 1.27 1.28 1.28 52.4% 1.46 1.25
Manufacturers 1.40 1.45 1.46 1.21 1.20 1.19 78.6% 1.46 1.18
Retailers 1.45 1.53 1.57 1.51 1.50 1.50 0.0% 1.62 1.45
Wholesalers 1.23 1.31 1.34 1.13 1.17 1.17 52.2% 1.34 1.11
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