On November 15, the Census Bureau released its monthly report on Manufacturing and Trade Inventories and Sales. Despite the fact that is it mid-November, we are just now getting data for September.
The census bureau headline reads “total business inventories/sales ratio based on seasonally adjusted data at the end of September was 1.38.” That’s a decline of 0.1 percentage points.
I went back through a number of charts to highlight major flaws inherent in superficial reporting on headline numbers.
Bloomberg Econoday saw things this way:
“Inventories proved tame in September, rising only 0.1 percent against a sharp 0.7 percent gain in sales that pulls the inventory-to-sales ratio one notch leaner to 1.38 from 1.39. High levels of inventories were a concern going into the fourth quarter but this morning’s very strong retail sales report may in fact point to the need to build inventories further.”
The Census Bureau posted this chart.
The above chart certainly does not reflect any need to build inventories. Here are some charts I produced from Fred, the St; Louis Fed data repository.
Total Business Inventory-to-Sales
Manufacturers Inventory-to-Sales
Retailers Inventory-to-Sales
Auto Inventory-to-Sales
Merchant Wholesalers Inventory-to-Sales
Apparel Inventory-to-Shipments
Fred did not have inventory-to-sales for apparel so I substituted shipments.
What is Normal?
In my first chart I asked “Is this is normal?” three times.
However, “normal” is not a constant, and it varies sector by sector.
Take autos for example. The distribution mechanism and the way autos are purchased has not changed in decades.
- Manufacturers ship autos to dealers.
- People buy autos from dealers.
- Dealers hold acres of cars.
The auto inventory-to-sales ratio is the least volatile in the group simply because the auto business has not changed. The number of auto dealers has not skyrocketed like the number of Wal-Mart stores. The number of US auto manufacturers changes very little over very lengthy periods of time.
Tesla style direct sales may change things in the future, but for now Tesla is a minor player.
Manufacturers vs. Retailers
- Manufacturer inventory-to-sales ratio bottomed in December of 2005 at 1.14.
- Retailers inventory-to-sales ratio bottomed over six years later in March of 2012 at 1.34.
- Total inventory-to-sales ratio bottomed in March of 2011 at 1.24.
What’s Going On?
Manufacturing inventory-to sales is a reflection of just-in-time production and delivery coupled with a more stable influence of autos.
Retailer inventory-to-sales is a reflection on a huge move towards online shopping and a massive buildup of new retail stores despite the clear shift towards online shopping.
Since auto sales are the biggest component of retail sales, the total inventory-to-sales ratio looks very peculiar.
Here is the answer to the “Is this normal?” question in my first chart:
One simply cannot analyze inventories in an aggregate fashion this way. A single chart does not provide enough information.
Ominous Charts
Individually, we can analyze the charts. They mostly look ominous.
- Despite record auto sales that realistically have little room to go anywhere but down, the auto inventory-to-sales ratio is at the top end of the range.
- Retailers have over-expanded in an economy that has clearly shifted away from big box stores to online delivery.
- The manufacturers chart is skewed because manufacturing includes autos.
- Merchant wholesalers looks downright scary.
Manufacturers are not going back to 1995 levels of inventory-to-sales except via a recessionary spike. The same applies autos.
Trends in online shopping suggest retailers have much inventory shrinkage to do. I expect more retail store closings and fewer new stores in the coming years. Retail stores add inventory and huge numbers of jobs. Where will job growth come from?
2016 Inventory Crisis
Talk of the need to build inventories is simply ridiculous. I discussed this previously in Inventory Crisis: Can Parrots Read Charts?
SupplyChain247 commented “These days, flexibility is best guaranteed through supply chain network technology. Nordstrom recently acquired a minority stake in DS Co., a cloud-based supply chain software firm. The motivation behind the purchase was to make direct shipments from vendors to customers much easier. Direct shipments are a clever way of reducing inventory burdens.”
Factor in the strong likelihood of global trade wars and the above inventory charts look worse than simply ominous.
For reflections on trade war possibilities, please see Expect Global Trade Collapse; Bills That Won’t Be Paid; Deflation Coming Up?
For department store carnage, please see Retail Department Store Carnage: Amazon to Blame? Mish 12-Point Summation.
Mike “Mish” Shedlock
Looks like a new normal. Inventory is being balanced against sales and safety stock. Lean is good, as opposed to build and bust. Smart people acting smart.
ZH frequently rants about auto channel stuffing. If true, some ill effects would be obvious even to a Democrat by now. Not so. Implication is they know what they’re doing any no problems in sight for now.
Biggest problem is in chart evaluation. The old data has little relevance to the new.
Also, only so many people spend a lot on clothes. The Project Runway and Fashion Police mindset is a TV phenomena more than a reality. Marshalls and Burlington Coat Factory live for these charts. I love jeans, a good quality t shirt, and a V-neck sweater unless a good hoodie is available. Most people are like me. Apparel inventories are big, but the GDP measurement is small.
In the 1990s, nobody knew what lean was. In 2005 it was a theory in new use. The old charts have no relevance and the evaluation has nearly as little when taken into consideration with the 1990s.
In the early 2000s, six sigma was running companies into the ground due to the need to prove innovation was relevant to a standard set by some statistical measurement. Motorola does not exist any more because of it. ‘Lean’ grew out of it, meaning people applied common sense to measurable observations. Old bloated inventory ratios have no relevance to today.
OK, technically, Motorola exists today, but in name only as It has changed hands a few times and the name still is known. The original company has moved on. Their phones are great. I have no idea who owns the underlying asset. Six sigma there … ???
“ZH frequently rants about auto channel stuffing. If true, some ill effects would be obvious even to a Democrat by now. Not so. Implication is they know what they’re doing any no problems in sight for now.”
You can’t be serious.
Most recessions are due to inventory correction. We’re due … and the charts above attest to that.
Yes, serious. 20 years ago, inventory caused boom bust economies. Computers and smarter management allowed for leaner inventory balances. Inventory recessions are old school. TJMaxx is a balancing factor. Not relevant except where idiots run the company.
Oh, I get it.
It is different THIS time.
Yes, it’s called ‘technological change’ but happened a few years ago. Some people haven’t noticed it yet and consider ‘ceterus paribus’ as their secret TA mantra.
“Yes, it’s called ‘technological change’ but happened a few years ago.”
That is so AWESOME.
I remember the “technological change” nonsense late 1990s on why the tech bubble would never burst.
Tony, 1990s DSL of 1.5Mb and 56k modems. Today I have 150Mbits at home and 1.5Gb available for a little more. Are you kidding or just pissed because you lost the argument? Today, if you don’t know lean, you don’t get the job.
Not kidding.
And I haven’t “lost” anything today.
@cdr
Are channels, like turtles, “lean” all the way down, or is inventories just stacked in smaller, and/or less easier to measure, piles across longer channels?
Excessively long and complicated channels/processes, is a/the textbook failure of artificially “stimulated” economies. And today, “inventories” are just as problematic if they exist in the form of contracts to buy/sell a given number at a given price in a given time, as if they are piles of goods on the ground. The main difference is the former are harder to diagnose, and makes lawyers more money.
For “Lean” to have fundamentally changed anything, the entire initial-demand-to-final-goods-delivery chain has to have been made more responsive. Smaller piles of physical goods, could be a sign of that. But could also just be a sign of physical goods manufacturing, constituting a shrinking share of total valued add in a production chain, with “inventories” piled up on the “business services” side of the ledger.
with near zero interest rates and excess capacity and space, and perhaps with “terms” from suppliers, there is almost no apparent cost to carry inventories especially if prices are going up a couple of percent a year.
It keeps people busy at various levels of the supply chain.
but as the charts show and imply sooner or later production cuts are necessary.
but there is another reason to build inventories–standard costs– if you run and build inventory you absorb costs and get to capitalize costs meaning you end up with higher profits as if NON GAAP, Mark to fantasy bank accounting, stock buybacks and playing with reserves and tax reserves is not enough. Although if revenues are not growing you need some trick to raise profits.
companies wil next do what the government does. Outright lie, mislead and deceive.
I sure don’t find much in stores worth buying. Most seem to have cut back on variety. I usually have to go online to find what I need.
Case in point — went to a Sears recently to find a part for an old vacuum cleaner. It was a tiny store with just a few items on display. The sales person went online to his own web site to order the part for me. I could have done this at home — there was no reason for the store to exist.
For that reason, I’d love to see most stores close down and turn the land back to another use. Most of the big chains used NIRP funding to expand way beyond common sense. That land can go back to nature.
Until Amazon gets punished (for making little money) cheap / no cost shipping will drive e-sales.
If no Amazon to set the tone, higher shipping costs would level the playing field brick and mortar.
Unless you are joking, why would anyone want to punish Amazon for being an effective provider of goods? They have raised the standard of living for all by a lot. I have relatives who won’t shop at WalMart because they punish small business by selling what people want at low prices. I consider them nice, but befuddled.
By punish I meant the market not tolerant of their stratospheric P/E.
If they – gasp – actually had to make a decent profit to please Wall Street … higher shipping would help … a lot.
Nobody is forcing anyone to buy Amazon stock.
You are missing my point. I care not a wit about Amazon.
But the fact is they lead the way in low / no shipping e-sales. And as long as not punished (by Wall Street) other players must play their game.
Tony, that’s called competition. Wall Street should be a follower. Amazon is treating them like that. Prices fall. I benefit. About wall street cry bullies in general – IDGAF.
Wall Street treats Bezos as the next Jobs.
If something were to happen to him … good luck Amazon shareholders.
You don’t think Amazon can’t get buy without $40B in SG&A/year? There is plenty of R&D and infrastructure that will last beyond it’s 3-year useful life baked into that. They are fairly profitable, but good management has trained stockholders to not demand profits each quarter so they can reinvest them in growing the value of the company.
If you’re comfortable with P/E of 175 … and no dividend … be my guest.
As long as Amazon sells me stuff I want at great prices, why should I care what some greater fool thinks? If he makes money, fine. If not, I don’t care. As mentioned, nobody makes anyone buy stock. PE 175 – IDGAF
Dude…I never said I owned it (I want no part of that at this valuation.)…I just said from an underlying economic perspective, they are profitable. (Source: I’m an accountant.)
Mish – think about the Apparel Inventory levels in light of the spreadsheet I sent you earlier this month – that clearly shows the plummeting volume of units coming into the country! And is has been dropping month after month. Down six of the last 7 months and ACCELERATING down now.
For your readers, the sheet is here:
https://www.scribd.com/document/331155514/161115-Apparel-Imports-Volume
Bullz cover your eyes –
Abercrombie Plummets 13% on Disastrous Earnings, Total Comps Down 6%
Read more: http://www.nasdaq.com/article/abercrombie-plummets-13-on-disastrous-earnings-total-comps-down-6-cm711387#ixzz4QONCQ2Ho
Recession pending??? As Abercrombie goes, so goes the world???? Duck, roll, and cover.
Communications Oriented Production and Inventory Control Systems (COPICS) was introduced by IBM in the late 1970s. Basically, sales orders flow from the point of sale down the chain all the way to suppliers of the most basic components of a product. This approach should eliminate excess inventory down the entire supply chain since it eliminates the lags between the various suppliers. As others have said, pre-1990 inventory to sales statistics are irrelevant as they reflect a totally different approach to production-inventory management (safety stock, two bin, etc.) that required larger inventories at all stages of production.
Mish Hi,
First of all excellent work as always.
Have you looked at the development of the level of inventories in relation to the GDP(goods ex energy only) ? This should indicate the level of risk inventories pose to the economy .
Best