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Wednesday, November 14, 2012

Seasonality of Business Inventories

Business inventories were reported today up 0.7% for September which is slightly higher than expected.  Inventories are an important economic data point to watch because GDP growth is highly sensitive to expansion and contraction in inventories.  Currently, the inventory to sales ratio is at 1.28x which is slightly higher than it was to start the year.  This is something to keep an eye on because if inventories rise faster than sales, there can be an inventory liquidation and a corresponding contraction in GDP.



Cyclically speaking, inventory data is important to GDP but is somewhat difficult to interpret because it is also affected by secular and seasonal variance.  On a secular basis, businesses have found a way to continually become more efficient and reduce inventory over time.  This makes it difficult to interpret what the "right" level of inventory/sales should be.

Seasonally, inventories will also shift in response to the holiday shopping season.  The government data is supposed to be adjusted for this, but is imperfect.  On average since 1992, inventories are ~6% higher in November than they are to start the year.  This year, inventories have grown a little more than average since January.  (Note that it's important not to read too much into whether that means that companies are "over-inventoried" because the chart is really just showing the seasonality in any single year.)



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