Wednesday, June 15, 2005 7:24:14 PM
The Truth about Building Material Inventory-to-Sales Ratio
This morning’s release of the Manufacturing and Trade Inventories and Sales Report is one of my favorites because of its relevancy. It measures business sales and manufacturing inventory activities. And, having these 2 sets of data enables me to calculate the Inventory/Sales Ratio. The Inventory-to-Sales ratio and the Sales-to-Inventory ratio are mirror images of each other. We only have to look at one of them. The category I’m particularly interested in is the “Building Materials”. That’s one indicator of the well beings of our housing market.
From this Inventory/Sales Ratio chart, it would appear that the inventory is not keeping up with the sales as this ratio had been declining for two consecutive months. In fact, it has fallen to the lowest level since July last year. When this ratio’s declining it generally means sales are moving faster than inventory build-up. At least, that’s what some “economists” said on this latest report. And, according to their interpretation of this ratio, it’s a sign of a growing economy where businesses were not burdened with as much cost of inventory while sales were moving ahead of the inventory build-up.
However, mathematically, it doesn’t have to mean the increase of the sales activity. It could also be that the sales are declining but just not as quickly as the decline of the inventory. If us average Joe’s would just take a moment of our time and eyeball the detailed numbers in this report, we could’ve easily spotted that’s exactly what took place.
The decrease of the sales of the building materials between December 04 and January 05 was really shocking. And, yes, I had to go back a couple of times to check on the figures just to make sure I didn’t make any mistake.
That’s a $5.5 billion differential!!! And, that's the real reason this Inventory-to-Sales ratio had improved. The sales were declining except that the inventory was declining even more quickly. Of course, we all know what the slow sales and the lower business investment in the inventory would do to our GDP.
Yes, the market participants get confused by all the news and the institutions program trading, but at the end, the fundamentals will not be denied. All is not well with our economy, fundamentally speaking.
This morning’s release of the Manufacturing and Trade Inventories and Sales Report is one of my favorites because of its relevancy. It measures business sales and manufacturing inventory activities. And, having these 2 sets of data enables me to calculate the Inventory/Sales Ratio. The Inventory-to-Sales ratio and the Sales-to-Inventory ratio are mirror images of each other. We only have to look at one of them. The category I’m particularly interested in is the “Building Materials”. That’s one indicator of the well beings of our housing market.
From this Inventory/Sales Ratio chart, it would appear that the inventory is not keeping up with the sales as this ratio had been declining for two consecutive months. In fact, it has fallen to the lowest level since July last year. When this ratio’s declining it generally means sales are moving faster than inventory build-up. At least, that’s what some “economists” said on this latest report. And, according to their interpretation of this ratio, it’s a sign of a growing economy where businesses were not burdened with as much cost of inventory while sales were moving ahead of the inventory build-up.
However, mathematically, it doesn’t have to mean the increase of the sales activity. It could also be that the sales are declining but just not as quickly as the decline of the inventory. If us average Joe’s would just take a moment of our time and eyeball the detailed numbers in this report, we could’ve easily spotted that’s exactly what took place.
The decrease of the sales of the building materials between December 04 and January 05 was really shocking. And, yes, I had to go back a couple of times to check on the figures just to make sure I didn’t make any mistake.
That’s a $5.5 billion differential!!! And, that's the real reason this Inventory-to-Sales ratio had improved. The sales were declining except that the inventory was declining even more quickly. Of course, we all know what the slow sales and the lower business investment in the inventory would do to our GDP.
Yes, the market participants get confused by all the news and the institutions program trading, but at the end, the fundamentals will not be denied. All is not well with our economy, fundamentally speaking.
David
#board-3693
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