More Stuff, More Sales: 4Q Outlook Improves as Data Signals Demand



Total business sales — the combined dollar value of trade sales and manufacturers’ shipments — increased a seasonally adjusted 0.8 percent on the month and 4.0 percent on the year to $1.318 trillion in November, according to data released by the U.S. Census Bureau on Tuesday. This compares against an inventory build of 0.4 percent on the month and 4.0 percent on the year to $1.7 trillion, growth that exceeded economist expectations but still not quite high enough to materially affect the total business inventories-to-sales ratio, which remained unchanged at 1.29.

Economists and market participants can use the inventory-to-sales ratio to determine whether production will increase or decrease in the coming months. Production generally slows as inventories rise and firms need to work down the build, and production increases as inventory declines as firms work to avoid shortages.

Corporate profits naturally increase when production increases — that is, when sales increase and inventories need to build to keep up — which can help drive up stock valuations. When inventories build faster than sales, though, this can foreshadow a slowdown in production, which could weigh on stock valuations.

A highly watched component of the business inventories report are retail sales and inventories, which are factored into the calculation for gross domestic product. Retail sales increased 0.3 percent on the month to $383.5 billion while inventories increased 0.8 percent on the month to $550.1 billion. The segment maintained an inventory-to-sales ratio of 1.43. Adjusted retailer sales are up 4.1 percent on the year, while inventories are up 7.3 percent.

Wholesale inventories, which are also factored into the GDP equation, increased 0.5 percent on the month to $516.8 billion, while sales increased nearly 1 percent to $440 billion, bringing the inventory-to-sales ratio down from 1.18 to 1.17. Adjusted wholesale sales are up 5.5 percent on the year, while inventories are up 3.3 percent.

November’s sale and inventory data is a good sign for fourth-quarter GDP. Relatively strong November sales indicate that the inventory build won’t result in unwanted goods sitting on shelves. As it stands, economists at Barclays expect fourth-quarter GDP to grow 3 percent, while Macroeconomic Advisers is looking for 3.5 percent growth.