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The Wholesale Inventory to Sales Ratio for Total Goods is rising, the latest signal that the slowdown occurring at the macroeconomic level is permeating all sectors of the US economy. It is also a development that wholesalers and OEMs should note.
At present, the Wholesale Inventory to Sales Ratio for Total (Durable and Nondurable) Goods 12-month moving average (12MMA) is at 1.35 and rising. Typically, a rising metric would be a positive indication. However, the Inventory to Sales Ratio is an inverse indicator, meaning that the rising trend is taken as a negative signal. The Inventory to Sales ratio represents the balance between the value of inventory at the end of the month and monthly sales; the raw number shows the number of months of inventory on hand based on the sales for the month. The current ratio of 1.35 indicates that wholesalers have enough product on hand to cover about one and one third months' worth of sales. Therefore, a rising ratio is indicative of swelling inventory levels, slowing sales, or a combination.
Wholesalers tracking this metric for their own businesses know that the observed rising trend is shouting a message: It is time to start trimming bloated inventory and prioritizing orders based on demand for each of your different products. During the slowing phase of the business cycle, cash is king, and excess inventory – as well as outstanding receivables – ties up cash. By lowering inventory and the associated carrying costs and continuing to rein in aging receivables, wholesalers can build up a cash reserve and a depth of strength to call upon later. In 2020, that cash cushion could serve as invaluable liquidity for companies at the bottom of the business cycle, enabling them to strike on capital expenditures, new hires, leasing or buying new space, and more.
OEMs that deal with downstream channel partners should take note of the Inventory to Sales Ratio trend as well. At ITR, we have recently observed decline in sales data for many of the OEMs we consult; in many instances their distributors are carrying excess product and have pulled back on orders. Track this metric to ensure that you are not caught off guard by potentially lower orders as US business cycle decline worsens into mid-2020.