Inventory Rebuilding Shows Economic Strength
“Sales bottomed sooner than companies expected,” so businesses now have fewer goods than they need, Hensley said. He projects the economy will expand 2.5% in the first quarter and 4% in both the second and third quarters, with the inventory cycle boosting GDP by 0.5%, 1% and 0.4% respectively.
The ratio of business inventories to sales was 1.25 in January, just above a 29-year low of 1.24 set in 2006 and down from a recession high of 1.46 in January 2009 (see chart above). The ratio averaged 1.3 in the last economic expansion, from 2001 to 2007.
As sales rise, businesses will have even more reason to add to their stocks, said Stephen Stanley, chief economist at Pierpont Securities. Nike reported that future orders for delivery from March through July rose 4% in North America from a year earlier. “We will certainly need the inventory to support that business,” Chief Financial Officer Don Blair told analysts.
MP: The inventory-to-sales ratio of 1.25 in January is back to pre-recession levels and is consisent with economic expansion. The strong inventory replenishment is just one more indicator that the economic recovery is real and sustainable.