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.