Is the U.S. economy in more trouble than we realized? On Wednesday, May 13, the U.S. Census Bureau released the March 2015 Manufacturing and Trade Inventories and Sales report. Sales for March are down 2.1% compared to the same period last year. Business inventories are up 2.9% year-over-year.
The total March business inventory-to-sales ratio is at 1.36. The ratio for last March was 1.30.
So…what does that mean?
Sales Down, Business Inventories Up
The high inventory-to-sales ratio is a worrying sign for the U.S. economy. Looking back, the last time the ratio was this high was in July 2009, when our economy was still deep in the Great Recession. (Source: Federal Reserve Bank of St. Louis, last accessed May 13, 2015.)
Sales are down; and that is not a good sign. This means consumer spending is not doing well. The importance of consumer spending cannot be stressed enough; it makes up about two-thirds of the U.S. gross domestic product (GDP). If consumer spending does not grow, growth in the U.S. economy will stall.
Inventories are up, which is even worse in times of slow sales. Managing and storing inventories takes time and money. If sales don’t improve and inventories keep piling up, there will be a point when businesses start to lay off employees. A cut to the labor force is the last thing we need in this fragile economy.
Note that inventory is also a part of the U.S. GDP, which grew a dismal 0.2% in the first quarter of 2015. If we exclude the piling up of inventories, the growth rate will be drastically lower.
Historical Trends Indicating U.S. Economy in Recession?
Lastly, when looking at economic indicators such as inventory-to-sales ratio, you should not just look at the monthly changes, or even year-over-year changes. What you need to do is look at historical trends.
Since the early 90s, the inventory-to-sales ratio has been declining. That is, until 2008, when the economic crisis hit. Then the ratio went down again until around April 2010, where it started to rise—until now.
The lesson here is that when such increases happen, the economy is usually going into a recessionary phase.