RELEVANCE: The Inventory/Sales ratio, or the number of months of inventory on hand, measures how quickly manufacturing and whole and retail trade businesses read the direction of the economy. Businesses typically do not anticipate recessions and slowdowns in the economy, and during those periods inventory tends to accumulate relative to monthly sales.
MECHANICS: The inventory and sales data are collected by the U.S. Bureau of the Census through monthly surveys of manufacturers and whole and retail trade establishments. The sample is stratified by detailed industry and covers at least 3,000 establishments. The data is reported approximately 40 days after the close of the month, with the sales data for the month and the end of the month reported inventory. The data from manufacturers excludes any firms with less than 100 employees. The data is only available for the U.S.
USEFULLNESS: As a practical matter, businesses don’t want to turn away customers when the economy is surging due to a lack of inventory. On the other, businesses don’t want to carry the cost of excess inventory when the economy is headed into a dive. Since the year 2000, during a stable economy the I/S equilibrium ratio has averaged below 1.3, rising above 1.3 on the perception that the economy is going to experience rapid growth.
The ratio of inventory to monthly sales, U.S.