“Low growth” seems to be the descriptor of choice for the current business and economic environment. Data released last week and earlier this week confirm that the U.S. manufacturing industry stumbled through the end of the third quarter, eking out modest growth against the prevailing economic and fiscal headwinds. Modest growth is better than no growth, but the data helped seed a cloud of market uncertainty — earnings have generally been strong and equity indexes continue to rise, but the outlook for the the third and fourth quarters is by no means clear.
The negative impact of the 16-day partial government shutdown aside, businesses appear to be coasting through the end of the third quarter and have not yet begun to show signs that they will accelerate. It’s still early to be thinking about the holiday season (seriously, who puts up Christmas lights before Halloween?) but recently released data, while solid, have done little to support the case for particularly strong third- or fourth-quarter economic growth.
The Census Bureau, along with the Department of Commerce, reported on Tuesday that manufacturing and trade inventories climbed 0.3 percent on the month in August to an estimated $1.66 trillion. The build-up was matched by 0.3 percent sales growth to an estimated $1.3 trillion, leaving the total business inventories-to-sales ratio unchanged at 1.29. The ratio was 1.30 in the year-ago period.
Economists and market participants can use the inventory-to-sales ratio to determine whether production will increase or decrease in the coming months. Production generally slows as inventories rise and firms need to work down the build, and production increases as inventory declines and firms work to avoid shortages.
In this spirit, it’s worth pointing out that the wholesale inventories-to-sales ratio also remained effectively unchanged in August, at 1.17 percent. Sales increased 0.6 percent on the month to $428 billion, matched by an equal build in inventories. Durable goods inventories climbed 0.6 percent on the month and 5.3 percent on the year, led by gains in motor vehicles and motor vehicle parts of +2.4 percent, and electrical and electronic goods of +1.1 percent. Nondurable inventories climbed 0.5 percent on the month and 1.6 percent on the year. Petroleum inventories increased 2.8 percent on the month.
The obvious upside to stable inventories is that production and employment figures should also remain stable. Of all the indicators that can be used to gain insight into the economy and business conditions, inventory and sales data paint a clear, straightforward picture. Sales growth marches on and inventories are keeping up. Look for a ramp closer to the holiday season. Until then, people are likely to focus on the indicators that have been more problematic recently, such as employment and inflation.
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