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What Sales and Inventories Tell Us About the Economy

sales-to-manufacturing-oct-2016-ted

In any given month, if sales outpace inventories, then firms are seeing strong demand. If inventories rise by more than sales, then demand is likely weak.

The fact that sales outpaced inventories in October helped push our index of leading indicators further into positive territory. Our Leaders Index stands at 58, up from 54 in September, with 50 being neutral. We view that as a further indication that the risk of recession in the coming months has diminished somewhat.

After declining since the beginning of the year, the manufacturing sales-to-inventory ratio improved to neutral in September, and remained neutral in October. In the latest month, manufacturers’ sales increased by $1.8 billion, led by a jump in sales of non-durable goods including food and textiles.

During the same time period, inventories rose less than sales, increasing $483 million. With manufacturers’ sales increasing by more than inventories, the trend in the ratio improved from negative to neutral.

Taken with other improvements in the leading indicators, including housing permits and debit balances in margin accounts, our index shows a slightly improved economic outlook.

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