Thursday, August 13, 2009

Inventory Snapshot

As inventory data came in weak today (-1.1% vs -.8%) let's look at the total picture, graphically(data ending in May). As can be expected inventories peaked in the second half of 08' and have been moving down steadily since. The two main effects of this are 1) a decrease in production and 2) a decrease in the supply of goods. Clearly inventories were not reduced enough as sales dropped precipitously, causing the inventory turn-over rate to drop(inverse of the red line). Basically, business inventories are sitting longer before they are sold. This causes firms to curtail purchasing even more, leading to a point where inventories start dropping faster than sales, which may be rebounding from discounting, increased consumer confidence, and stimulus. We are beginning to see this now, as the inv/sales ratio(red line) is dropping. As inventory decreases relative to sales we begin to see a situation where there is a reduced supply of goods available for sale relative to the level of purchasing power(sales). This will either increase prices(lower money-demand) or purchases, or both, I think.