The Census Bureau of the Department of Commerce just released promising information for the economy in its Business Inventory Report. The US business inventories to sales ratio is improving with a rise of inventories of 0.3% that corresponds with a 0.4% increase in November sales. According to analysis in USA Today, businesses lower their inventories significantly during recessions due to the decline in demand. The increase in inventories may be an indication that the economy is improving. When coupled with other recent economic news, this information provides a promising outlook for the economy.
The Business Inventory Report includes data on the inventories that businesses are maintaining relative to sales regarding the manufacturing, wholesale and retail firms.
The data also reflects an important dynamic between supply and demand. Businesses that have rising inventories often reflect a positive perspective of the economy. If businesses are stocking inventories, they are anticipating a greater amount of sales and higher consumer demand. However, if businesses have too much inventory, supply will exceed demand. This mismatch can cause unemployment as businesses slow production to allow inventories to run down. Many economists view a steady growth of inventory as a positive indicator of economic growth.
The Business Inventory Report cannot be used on its own in order to assess the health or future of the economy. The report provides statistical data for two months prior to the report, making the report a less timely and useful measure than other available data. Manufacturing and wholesale information is released prior to the release of the information pertaining to retail sales, so the market typically does not have a strong reaction to the limited new information the report provides. However, an increase in inventories coupled with an increase in consumer spending and a decrease in unemployment claims indicate a stronger confidence in the economy as a whole. This confidence helps business owners and consumers to be cautiously optimistic about the economy.