Inventories up Again in April, but Increase More Slowly

Businesses continued to ramp up their inventories in April, but not as quickly as they had the past few months. They grew by 0.4%, according to the Census Bureau. Inventories grew approximately as quickly as sales, resulting in the ever-important inventories-to-sales ratio remaining flat. It could be stabilizing, which indicates any hiring going forward might more closely match sales growth.

First, here's a chart showing the month-over-month change in business inventories since 2001:

inventories 2010-04.PNG

As you can see, inventories had been growing again in February, but in April they didn't grow as quickly, as they had been. Since the economic recovery began, businesses had been slow to ramp up their production. As a result, the inventories-to-sales ratio fell below its normal level. It continued to fall this year, but it has now been stable for two months at 1.23, since April sales growth was also weak. Here's its chart:

inventories-sales 2010-04.gif

As this ratio remains low, it indicates businesses aren't hiring quickly enough for additional inventory to match the increase in sales. This isn't good news for a quick labor market recovery. Eventually, they'll need employees to match consumer demand, but they remain reluctant to do so. If it's stabilizing, then employers will continue to hire at a similar rate as sales growth.

As my colleague Derek Thompson pointed out earlier, however, sales fell in May. So this ratio could have very well risen last month. This could cause businesses to question the recovery and slow their hiring again. They don't want to overestimate future demand, and produce more inventory than necessary. If they believe sales aren't going to continue to grow, then the workforce won't either.