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Keeping an Eye on Inventories

Monday's business inventory report from the Census Bureau confirms that excess inventories continue to be absorbed. Inventories have to return to "normal" before production, imports and freight can recover to the level of current consumption

by Staff
April 17, 2001
2 min to read


Monday's business inventory report from the Census Bureau confirms that excess inventories continue to be absorbed. Inventories have to return to "normal" before production, imports and freight can recover to the level of current consumption.

Inventories declined 0.3% in February, keeping the inventory/sales ratio at 1.37, about 41 days of inventory. Early reports for March sales and production suggest that the ratio will at worse be steady, and likely will decline slightly.
What's "normal"?
The inventory/sales ratio was as low as 1.31 last March. Then, inventories were considered too lean. The ratio has been trending down for more than a decade with better inventory management (and the help of "just-in-time" truck shipments). So the ratio that is consistent with balanced inventories this spring is in the 1.28 to 1.32 range. This means that there were 1.5 to 2.7 days of surplus inventory at the end of February, and there are almost certainly less by now. If sales are steady, it will take two to six months to work off the excess, beginning in April. If sales increase at a modest 2% annual rate, the inventory excess could be gone by end of May.
Retailers have inventory nearly balanced now. They shifted their problems to their wholesalers. Wholesalers are now pushing the problem back to their manufacturing suppliers of finished products. That means that the worst inventory problems this spring will be with the next link in the supply chain - component and material manufacturers. You will see reports of sharp production cuts and layoffs from industries such as telecommunications semiconductors, metal component manufacturers and industrial chemicals.

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