Falling business inventories viewed in positive light

Business inventories in the US fell 1.1% in April to $1.4 trillion, the eighth consecutive monthly drop and slightly larger than expected. Sales were down a more modest 0.3%, and the inventory-to-sales ratio, or how many months it would take businesses to liquidate all stockpiles, fell from 1.44 to 1.43.


The inventory-to-sales ratio is an important indicator that economists look at because it shows how many goods are on hand based on sales, i.e., what's in the warehouse. Late last year, sales virtually fell off of a cliff and inventories soared, pushing the ratio sharply higher.

Companies responded by quickly slashing output as industrial production fell at an annualized rate of 20% in 1Q.

Falling inventories are apart of the GDP equation, and a drop will pressure the economy while rising inventories add to GDP growth. However, at this point in the business cycle, the decline in stockpiles is viewed positively because it is being seen as a sign that companies are whittling away at the excess number of goods on hand.

As sales slowly rebound, which I anticipate later in the year, inventories should drop to levels considered more normal by businesses. And we are likely to see further declines in inventories as companies pare back on bloated levels. But companies will get a handle on inventories, and an eventual rise in sales will eventually lift production.

Meanwhile, for a look at today's weekly claims report and retail sales, please see my homepage at Examiner.com.