A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

March 23, 2015

Inventories: less can be more
Manufacturing & Trade Inventory-to-Sales Ratio: Dec 1980 – Dec 2014


Source: Census Bureau via Bloomberg, as of 1/31/2015. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The initial estimate of US GDP growth for 4Q14 was recently revised downward, from 2.6% to 2.2% – not especially encouraging for investors hoping for further pickup in economic activity.
  • However, that downward revision can be attributed in part to lower levels of inventory accumulation than were assumed in the previous estimate – which does have positive implications for continued future growth.
  • Why? If inventories were to grow too large, production would need to be cut until excess inventory is worked through. If those cutbacks were significant, then overall growth could slow abruptly.
  • Contrast that with a more modest inventory build-up – one that would allow companies to carry on production even if there's a temporary falloff.
  • That might allow companies to weather a temporary slowdown in demand – which is how some are interpreting the recent slowing in retail sales, durable goods orders and the ISM's Purchasing Managers Index for manufacturing.¹
  • In the past, big swings in inventories were a major factor contributing to "boom & bust" periods in the American economy. However, the introduction of new technologies that allow for better monitoring and control of inventory levels has helped moderate that.
  • For example, there have been three official recessions averaging 11.1 months in length since 1990—a period that arguably covers the widespread introduction of inventory control technologies. Contrast that to the period between post WWII era until 1990, when there were eight recessions, averaging 18.2 months in length.²

The chart:

  • The chart above shows the inventory-to-sales ratio from the Census Bureau's Manufacturing & Trade Inventory and Sales series, which compiles data from the wholesale and retail sectors of the economy.
  • The inventory-to-sales ratio measures the number of months it would take businesses to deplete their shelves if the pace of sales remained constant.
  • The ratio was in general decline from the 1980s until the early 2000's; for that quarter century the ratio averaged about 1.5 months.
  • Since then it has stabilized, averaging just below 1.3 months over the past decade—even including the spike during the recession of 2008-2009 (not a typical recession).
  • In January, the I/S ratio was 1.35 months, above the 10-year average and the highest since July 2009.


¹ Source: Bloomberg. Retail sales declined on a month over month basis in December, January and February. In January 2015 (the latest available), durable goods orders, excluding the more volatile transportation orders, were 3.3% below their peak of September 2014. Including transportation orders, they were 2.1% below the July 2014 peak. The ISM PMI slowed to 52.5% in February from 52.9% in January, which was a decline from 57.8% in December.

² Source: National Bureau of Economic Research, US Business Cycle Expansions and Contractions


Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The Manufacturing and Trade Inventory and Sales estimates are based on data from three surveys: the Monthly Retail Trade Survey, the Monthly Wholesale Trade Survey, and the Manufacturers' Shipments, Inventories, and Orders Survey.

The Institute for Supply Management's (ISM) Purchasing Managers Index (PMI) for the US manufacturing sector measures sentiment based on survey data collected from a representative panel of manufacturing and services firms. PMI levels greater than 50 indicate expansion; below 50, contraction.

The Institute for Supply Management (ISM) is an association representing more than 48,000 purchasing and supply management professionals. It conducts regular surveys of purchasing and supply managers to determine industry trends.


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Will the current wave of central bank easing jump-start the world's economies?


Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
No - Deflation is already taking hold, making monetary policy changes ineffective
Yes - The US model shows that monetary easing can help economies heal in the medium term
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact

Previous month Poll

What would be the best news for markets for the remainder of the year?

Strong US corporate earnings validate US economic expansion
Strength in the US dollar convinces the Fed to keep short rates low longer
European Central Bank bond buying rekindles growth in European Union countries
Growth in China strong enough to leave room for financial system and structural reform