Manufacturing and trade inventories in the U.S. increased in February by 0.5% on a seasonally-adjusted basis, according to the Commerce Department. This increase is small, but larger than January's 0.2% rise. The inventory-to-sales ratio, another important data point the report provides, remained flat at 1.27. Its value implies that economic expansion and hiring should follow as sales increase.

Here's a chart showing the inventory-to-sales ratio since 2001, provided by the report:

inventories 2010-02.PNG

During the recession, inventories rose while sales declined. That created an imbalance resulting in layoffs. The height of the peak shows part of the reason why unemployment increased so much. At that time, firms ramped up firing to try to match the lackluster demand for goods. Since the start of 2010, however, it looks like the balance is finally getting back to around where it was from 2005-2007.

It's important to note that this is February's data -- it does not take into account the relatively strong retail sales data also released today from March. It showed retail sales rose by 1.8%. In February, retail sales only increased by 0.2%. This indicates that, unless manufacturers, retailers and wholesalers ramped up their inventories in that month more than sales increased, the ratio should have declined in March. The lower it goes the more need for additional workers to match the demand for products.

Also notable is which sectors saw their retail inventories increase or decline:

inventories cht1 2010-02.PNG

Most rose just a bit since January, with all major categories growing less than 1% except autos and parts. Yet that same sector experienced a big 6.7% increase in retail sales during March. So much of that additional February inventory probably got depleted by consumers buying cars last month. Meanwhile a few products actually saw inventories decline further. Clothing and furniture were two notable categories in February where inventories didn't keep up with purchases.

The decline in inventories from February 2009 shows the massive depletion that stores felt was necessary to respond to weak consumer demand at that time. All categories except food are vastly lower than they were a year ago.

Today's data is also encouraging because it shows that any business expansion we've seen in the first part of 2010 isn't outpacing consumer demand, with inventory levels remaining nearly flat. Considering how strong retail sales were in March, there's also reason to believe that inventories will fall during the month -- unless more hiring produced additional goods to compensate for the increased buying. Given the current balance of inventories and sales, there's little reason to believe U.S. businesses should engage in many more mass layoffs unless consumer demand unexpectedly weakens significantly.

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