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Schwab Guide to Economic Indicators: Manufacturing and Trade Inventories and Sales by the Schwab Center for Financial Research November 30, 2007 What is it? It's a supply-and-demand indicator, produced by the U.S. Census Bureau, that summarizes sales and inventory data of:
Medium. The report is monitored in conjunction with a variety of other economic indicators to help gauge the direction and strength of the economy, and what the Federal Reserve might do next with short-term interest rates. Though this monthly indicator is not as comprehensive and meaningful as the quarterly gross domestic product report (GDP), its timeliness can be important. When economic growth is thought to be near a turning point—up or down—this data can provide a monthly heads-up while quarterly data is awaited. What impact does it have on the market? In general, it has an inverse relationship with the market. A rising inventory-to-sales ratio can depict economic weakness. A declining ratio can reflect economic strength.  The overall economic backdrop, and expectations of what is needed from monetary policy and where it's perceived to be headed play a major role with the direction of stock prices. If the ratio is trending lower—indicating supply (inventories) is not keeping up with demand (sales), it may suggest the economy is overheating. That could show a need for increased production of goods. In this situation, bond prices typically fall (yields rise) on the outlook for greater overall economic demand, potentially higher inflation and an increased chance that the Fed will hike interest rates. Stock prices may also fall. Why? A rise in bond yields can eventually make bonds more attractive once the fall in bond prices settles down. Compared to where the weights of stocks and bonds were in your portfolio, the typical thing to do in response to this change in valuation would be to sell a portion of your stock portfolio and put the proceeds into bonds. Even if corporate profit growth seems supported in this time of potentially higher rates of production, the market will likely see it as being short lived given expectations for impending rate hikes and eventually slower economic growth. There's a scenario where stocks prices could experience a temporary lift if the economic backdrop is subdued. Suppose the inventory-to-sales ratio comes to life in a manner suggesting upcoming production strength during an otherwise weak economic period. This can give a boost to stock prices even with an expected rise in bond yields. That's because the market's expectation of potentially higher profit growth from greater economic demand can initially be the more influential factor in favor of higher stock prices. That is, for a period of time, it can be the more-dominant driver of stock prices, overshadowing the negative impact of rising bond yields (as discussed above). While the renewed strength in the ratio might suggest an eventual need for Fed rate hikes, it probably wouldn't be deemed immediate because of an otherwise weak economic backdrop. It would likely take some time for other economic reports to strengthen in order to validate the existence of an economic recovery. A weak report (rising ratio) would typically lift bond prices (reduce yields). Suppose the economy is strong but monetary policy had recently become tight (restrictive). Stock prices could improve on hopes of a halt in the Fed's rate-hike campaign, along with the possibility of a future injection of economic stimulus if the next move by the Fed is a rate cut. A weak report and a weak economy probably wouldn't help stock prices. That's because the chance of recession and reduced corporate profits would likely be the dominant fears. How is it calculated? Dollar values of sales are compared with inventories to create an inventories-to-sales ratio. The resulting ratio expresses how long (in months) it would take to deplete the present level of inventories at the current sales rate. Data for sales, inventories, percent changes and ratio are presented on a seasonally adjusted and not-seasonally adjusted basis for:
The report is also broken down by kind of business for retail:
How is it used? "The Bureau of Economic Analysis uses the data in GDP estimates and the leading economic indicator series. The Fed, the Treasury Department, and the Council of Economic Advisers use the data to develop monetary and fiscal policy. The data are widely used by private economists, corporations, trade associations, investment consultants and researchers for market analysis and economic forecasting; and by the news media in general business coverage and specialized commentary," the Census Bureau said. Sales data are useful on their own as are inventories. Sales growth can help gauge if one industry is gaining strength over another. Sudden inventory buildups may reflect the potential for economic weakness. Yet stockpiling might also depict a planned buildup in anticipation of higher future demand. But it's the inventories-to-sales ratio that can be the most valuable data. The seasonally adjusted inventories-to-sales ratio is used to detect supply and demand imbalances. This is important to the Fed because monetary policy is based on balancing supply with demand in order to achieve price stability. Rate cuts are associated with too much supply; rate hikes with too much demand. The retail breakdown by kind of business helps pinpoint where imbalances might be occurring by industry. It also helps the Fed anecdotally detect the impact from changes in monetary policy on industries that might be more sensitive to rate changes, such as housing. When is it released? The report is released approximately six weeks after the close of the reference month. It can be found at the Census Bureau's Web site within the "Economic Indicators" section. Click on "Total Business Sales" for the latest release and the individual manufacturing, retail and wholesale reports. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. (2007-5771) Return to Top |
Schwab Guide to Economic Indicators
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