Electrical goods inventory at historically low levels
January 28, 2011
Inventory levels for electrical goods manufacturers remain near historically low levels according to the latest monthly wholesale trade data from the U.S. Census Bureau. The tight inventory level is a sign capital spending in the electric industry is rebounding.
The Monthly Wholesale Traders report tracks month-to-month changes of sales and inventories for U.S. distributors. A declining inventory ratio indicates industry wholesalers are not keeping pace with the rate of sales. Chart 1 above (click to enlarge and scroll to Chart 1) shows the overall growth in electrical and electronic goods sold at the wholesale level since 2000. Recessionary periods are shaded.
Chart 2 indicates inventory levels during the period. Note that while sales peaked either before or at the beginning of the recessions, inventory did not peak until 6-9 months later. Since sales declined first, the delay in wholesaler's response meant an increasing inventory ratio. The ratio is calculated by dividing inventory by sales. The higher the inventory ratio, the more goods electrical goods wholesalers have on hand.
Chart 3 graphs both sales and inventory with lines marking peak levels for each. The wholesaler's delayed response in clearly shown by the distance in the two vertical lines, ranging from 6 to 9 months after peak sales. However, sales turned up within just 3 - 6 months after wholesalers started cutting inventory. Nevertheless, wholesalers continued tightening inventory for another 12-18 months until reaching a point of recognition (Chart 4).
The Inventory Ratio best captures the historical relationship between inventory and sales of electrical goods suppliers. The ratio peaked during the midst of recessionary periods, making it a good indicator to follow for signs of industry turnaround.