Inventory to sales data suggest further retail adjustments - A business cycle indicator to watch

 

Analysts are often looking for that right macro signal to be first with calling a market change. Inventory builds is a good signal that production will have to be adjusted and prices will have to fall to clear market excesses. We are seeing an increase in inventory to sales ratios over the last year especially for retailers. We already got a splash of cold water from retail stocks last week which was after these numbers were presented by the Census Bureau. Manufacturing inventory to sales yearly changes have been flatter but still trending higher. However, if we look at the inventory to sales ratio from the pre-pandemic level, retail is lower and manufacturing is higher. This suggests a bullwhip effect for retail and production mistakes for manufacturing.

Given the greater focus on services, inventory adjustment business cycles have not been as important as financial crises as key recession drivers over the last few recessions, but that does not mean that inventories should not be watched closely. A continued trend through the summer will be a clear indication of a slowdown and will have the further impact of slowing price increases especially for durable goods.