Each month the US Census Bureau issues a report on inventory levels of manufactured goods. The time series data is presented in both seasonally adjusted (SA), non-inflation adjusted dollars and inflation adjusted dollars. The inflation adjustment is made by using the Census Bureau’s producer price index (PPI), series for each of its nine categories.
In this report, we will discuss SA, inflation adjusted data only. Total manufacturing inventories stood at $563,908 million (M), at the end of March, down 0.1% month on month (m/m), and down 1.4% year on year (y/y). The total manufacturing inventories to shipment ratio (I/S), was 1.32 for March, up 0.01 m/m and down 0.05 y/y.
Figure 1 presents the I/S ratio for durable goods inventory in both SA and NSA format for, 1992 to present. The SA I/S was 1.61 in March, where it has been for the last four months. The ratio was 1.67 for March 2016 and 2015. A smaller ratio results in higher inventory turns and a faster cash to cash cycle and therefore is generally the goal of a manufacturer. The I/S ratio came steadily down throughout the 1990s and early 2000s. Information technology and higher productivity get most of the credit for this improvement. When the recession hit the I/S ratio jumped as consumers cut their spending and inventories climbed ad layoffs ensued. In March 2012 the I/S corrected falling 1.97 in January to 1.66 in March. Since then it has been in a narrow range between 1.61 and 1.68.
Figure 2 examines manufacturing inventories (blue line, left-hand scale), and it’s I/S ratio (red line, right hand scale). Inventory levels climbed after the recession ended, plateaued in 2015, then dipped throughout 2016. So far in 2017, inventory levels are climbing modestly, while at the same time he I/S ratio is falling. This is a good sign for manufacturers.
Figure 3 breaks out motor vehicles. Cars (blue line), light trucks (orange line) and heavy duty trucks (green line). Cars and light truck inventory rose steadily after the recession as sales ramped-up. They have peaked and are now started to decline. Heavy truck sales have been comparatively flat over the same timeframe. The Census Bureau I/S category includes all motor vehicles and parts. It was 2.00 in 2010, and had traded in a fairly narrow range from 2.00 to 2.24 through 2016. Thus far in 2017 the I/S ratio is inching higher in successive months, 2.19 in January, 2.25 in February and 2.28 in March. This indicates that sales are slowing and inventories are building. Indeed Ward’s automotive reports that days-supply in April was 76, up 6 days y/y.
At Gerdau, we periodically review the Census Bureau’s inventory report to get a gauge on how manufacturing is currently performing and to get a read on likely future outcomes.