Wednesday, January 6, 2016

Five graphs for 2016: #3, the inventory to sales ratio

 - by New Deal democrat

This is the third installment of 5 graphs to watch in 2016.  The first two were:
One consequence of the recently strong US$ has been a shallow industrial recession.  This is been accompanied by a relative buildup in inventories compared with sales:

The current level of the inventory to sales ratio has sometimes but not always indicated a recession.

I plan on looking at this ratio decomposed into its two components:  sales (blue) vs. inventories (red):

This is because sales peak/trough first, and inventories catch up with a lag.  For the last few months, inventories have gone sideways, even as sales have continued to slide.  In order for the buildup to be liquidated, inventories must turn down.  That will most likely be accomplished by a significant cutback in production - with nasty consequences for some important economic numbers like employment (but not necessarily a downturn vs. a slowdown).

So I will be watching for two things: (1) a downturn in inventories, indicating the liquidation is underway; and (2) a bottoming of sales, indicating the inventory correction is over.