Understanding Business Inventories

A business inventory is an economic figure that tracks the dollar amount of inventories held by retailers, wholesalers, and manufacturers across the nation.

The business inventories report is compiled from three sources: the Monthly Retail Trade Survey, the Monthly Wholesale Trade Survey, and the Manufacturers' Shipments, Inventories, and Orders Survey.

The inventories-to-sales ratio from the business inventories report released by the Department of Commerce is an indicator that goods production may slow down or increase in the future.

Business inventories is a shortened term that refers to the "Manufacturing and Trade Inventories and Sales," a monthly report released by the U.S. Department of Commerce. The business inventories report is compiled from three sources: the Monthly Retail Trade Survey, the Monthly Wholesale Trade Survey, and the Manufacturers' Shipments, Inventories, and Orders Survey.

Monthly Retail Trade Survey: Retail merchandise inventories are the value of goods held for sale at the retail level at cost as measured primarily by the FIFO (first in, first out) method of valuation.

Monthly Wholesale Trade Survey: Inventories at wholesalers, the companies that distribute to retailers, are added to the business inventories numbers each month.

Manufacturers' Shipments, Inventories, and Orders Survey: At the manufacturing level, stocks of goods, whether in raw material, work-in-process or finished, are valued at cost, again primarily by FIFO.

The sum of the three components is the business inventories figure. The monthly survey has a table that breaks down the three numbers with a sequential comparison to the previous month and a year-over-year comparison (current month versus the same month in the prior year). Also, the report shows "adjusted" figures that take into account seasonality. It often cannot take into account figures in backflush costing scenarios, due to their nature.

One of the more interesting data points that come out of the business inventories report is the inventory-to-sales ratio, which is an indication of the relative size of inventories to the pace of sales. For example, a ratio of 1.5 would mean that there is enough merchandise in the system to cover one and a half months of aggregate sales.

The trend line should be used in conjunction with a single static figure. If the ratio is rising, it could be an indication that the near-term production of goods will slow down as excess inventories are worked off.

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