One data point economist look at in ascertaining the strength of the economy is the inventory to sales ratio. As noted by a recent report from Argus Research:
"If the I/S ratio rises, it is generally a sign that spending is slowing since inventories (numerator) are rising amid lackluster demand. Higher I/S ratios, therefore, imply economic softness. Businesses (retailers, wholesalers, and manufacturers) don’t want to be caught with deep inventories amid a pullback in spending. The latest available data suggest that the inventories/sales ratio is 1.24, or 1.24 months of available stock give the current pace of sales. And since this measure is approaching an all-time low, and is not exhibiting any recessionary upward trend like it did leading up to the 2001 recession, we believe that a major economic downturn is not in the cards."
(click on graph for larger image)
January 25, 2008