Following the severe downturn we've had, many economists would probably agree that one key ingredient for a sustained economic recovery is a healthy (i.e., low level) of inventories relative to sales.
Relatively speaking, if businesses are carrying too much inventory on their books, that can act as a drag on growth because they will be hesitant to crank up production -- and hiring -- until stocks are whittled down to more comfortable levels.
So, what does the latest data reveal on that score?
On the one hand, businesses that manufacture nondurable goods (i.e., those intended to be used for less than three years) have done a good job getting the relationship between stocks and sales into a favorable balance. As of January, the inventory-to-sales ratio (ISR) for this segment is only 4.4 percent above the two-decade lows seen in July 2008.
In the case of the durable goods-producing segment, which includes carmakers, for example, the situation is less benign. While the ISR is 12 percent below its May 2009 peak, it is well above its lowest readings. Based on the latest data, the ratio is 28.2 percent higher than where it was in March 2004 and 8.4 percent higher than it was in July 2008.
That's not to say that the durable goods ISR won't fall -- or isn't in the process of declining -- to a level that gives manufacturers of these products reason to be optimistic -- and to expand output.
However, it seems to me that unless businesses in both segments are experiencing conditions that give them cause for comfort, the notion that we are on the cusp of a sustained recovery remains suspect.
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