Business inventories increased by 0.4% in November to $1.3 trillion as manufacturers, wholesalers, and retailers begin to increase inventories in response the huge drawdown in stockpiles experienced through much of last year.
Meanwhile, sales jumped an impressive 2%, bringing the closely-followed inventories-to-sales ratio from 1.30 to 1.28. At the current level, inventories-to-sales are back in the range seen through much of 2005 through the middle of 2008, before the Lehman Brothers’ crisis sent the economy into a tailspin.
Interestingly, the ratio is well below where is stood just after the 2001 recession officially ended in November of that year, highlighting how quickly companies slashed production and orders.
What is the significance of all this?
Businesses hit the brakes on inventory accumulation at the start of 2009, weighing heavily on economic activity. With inventories back inline in relation to sales, companies are increasing orders and production, which is lending support to the economy.
Manufacturing is only a small portion of the total economy, but the sector is more volatile than the service sector so increases (or decreases) can spur GDP growth (or decreases can and do exacerbate a downturn).
In this case, continued increases in aggregate demand will likely stoke economic activity in the short and medium term. And that’s good news!
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