U.S. business inventories recorded their biggest increase in nearly a year, which could see economists raise their growth estimates for the second quarter.
On Thursday, the Census Bureau released its Manufacturing and Trade Inventories and Sales report for April 2015. Total sales, including distributive trade sales and manufacturers’ shipments, were estimated at $1,318.8 billion for April. This number was 0.6% higher than March, but 2.3% lower compared to April of last year. (Source: U.S. Census Bureau, June 11, 2015.)
Growing inventories are a sign that businesses are expecting stronger sales growth in the future and are just preparing for it. Stockpiles are a key input into calculating gross domestic product (GDP), and are commonly used as an indicator of the economic health of a country. April’s report will likely force economists to boost their second-quarter growth forecasts.
However, one red flag in this report was a big increase in the inventory-to-sales ratio, which measures how many months it would take for businesses to sell off their entire merchandise in storage. Currently, the ratio sits at 1.36 months, the highest figure posted since the height of the financial crisis of 2009. That suggests sales are slowing and companies cannot deplete their existing stocks fast enough.
Despite its positive effect, piling inventories are a concern for U.S businesses. Managing and storing inventories takes time and money. If sales do not pick up and inventories keep piling up, there could be a point when businesses start to lay off employees. Although job gains were solid in May, economists fear the U.S. economy is still in a recovery stage and cannot afford any cut to the labor force.
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