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By New_Deal_democrat October 9, 2015 11:58 am
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Inventory to sales ratio shows shallow industrial recession not abating

The other day I wrote that the data point to watch this week was the inventory to sales ratio for wholesalers.  This morning's report (for August, this series is reported with a significant delay) was somewhat bearish.  Sales fell by -1.0%, while inventories rose by +0.1%.  The overall inventory to sales ratio, shown in the graph below, rose slightly from 1.30% to 1.31%:

This is a slight worsening in conditions.

When we decompose this relationship into sales (blue in the graphs below) vs. inventories, the news is gloomier. In the graphs I've normed both sales and inventory to "1" at the outset of the series in 1992. Here are the 1990s and the 2001 recession:

Here are the last 10 years through July:

What we can see is that sales lead inventories.  Wholesalers react as if the recent sales trends will continue, and have to adjust inventories when sales underperform or outperform expectations.  *Most importantly, the inventory to sales ratio can increase either because, while sales are increasing, they have increased less than inventories (as in 1995 and 1998), or because sales are decreasing, inventories are still rising - or aren't falling quickly enough (the recessions of 2001 and 2008-09).

Unless sales spontaneously pick up, inventories are going to have to undergo liquidation - and that presumably means layoffs in the relevant industries.  A YoY comparison shows that while inventory accumulation has slowed, and has not made a new high in the last two months, but there is no sign of liquidation yet:

In short, this is the real deal:  a shallow industrial recession. I reiterate, however, that industry much less a driver of the overall US economy than it was 100 or 50 or even 30 years ago.  The consumer economy, while undergoing a slowdown, shows no signs of rolling over, and the most leading sectors - houses and cars - are quite positive.

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