Bad Omen?

The Lehmann Letter (SM)

On January 11 the Commerce Department released its latest monthly report on business sales and inventories:

The data show an ominous climb in the inventory/sales ratio.

Inventory/Sales Ratio

4.3 Inventory-Sales Ratio 01-18-16

(Recessions shaded)

You can see the ratio spike with each recession. When sales fall, businesses accumulate stocks (inventories) of unsold goods. Inventories rise as sales fall, driving the inventory/sales ratio swiftly north.

Business sales peaked in the summer of 2014 and have fallen ever since. Inventories continued to grow and the ratio climbed. Now business has begun reducing inventories, too, in response to dwindling sales.

The ratio’s rise may be a warning of a weaker economy ahead.

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© 2016 Michael B. Lehmann