One indicator to watch to assess the economy's health is by monitoring inventories. Business owners and sales and purchasing managers are watching their business and customer activities to forecast how much inventory they need to meet demand. Managing inventory is a coordinated team effort as the owners track their available capital and credit while the sales team informs the purchasing managers what quantity is needed to fill orders and meet projected sales. This inventory management to projected demand is especially critical going into the holiday season when the preponderance of retail sales occurs for many businesses.
When sales increase faster than supply, then inventory shrinks. It is typically a good economic indicator when inventory is shrinking, as it may represent that sales are increasing faster than supply. The typical follow-up event is purchasing managers who determine the need to increase inventory and increase their orders, increasing manufacturing sales. Rising volume in the entire sales channel from manufacturing to retail is good for businesses and profits. The slowing down of the sales channel is similar, which starts with sales declining faster than the flow of new supply of inventory.
Yesterday, the US Census Bureau released a manufacturers and trade inventory report indicating the first Month over Month (MoM) decline of inventory since 2021. Inventories have changed wildly over the past three years due to significant disruptions of supply and unusual swings in demands of products not consistent with past cycles.
Yesterday the US Department of Commerce reported that retail inventories moved in the opposite direction, increasing 0.8% in February. Econoday provided the following comments on this report,
“By far the steepest build for this sector of the last six months. Restocking at car dealers, up 1.9 percent in the month, are behind the large gain through retail stocks excluding dealers did rise 0.4 percent.”
Based on these two reports, consumer spending is predictably still slowing while manufacturing and trade activity is increasing.
However, the balance of supply to demand seems to be less erratic and becoming more predictable for purchasing managers and economists.
What Does This Mean to Me?
After three turbulent years that have included a worldwide pandemic, subsequent government interventions, supply chain disruptions, wars, and rising interest rates, the US economy is holding in a steady state of reasonable stability. The aggressive Federal Reserve rate increase campaign that started in 2022 and continues in 2023 has negatively impacted the credit, lending, and bond markets. This time it's not a disruption of merchandise but of capital. Businesses and individuals are shocked at lending costs, with interest rates now up 200% or more from Q1 2022.
The impact has been significant for developers of multi-million-dollar developments to individuals buying a single-family home. The result is and will continue to be a slowdown of all levels of economic activity until incomes and available capital increase to offset the rise in lending costs. So far, the impact on the labor market has been mild, with wages leveling off as more workers are applying for jobs and the unemployment rate still remains at 40-year lows.
The S&P 500 has remained in a positive uptrend since October 11, 2022. Investors are comforted with the absence of wild market volatility even during the past couple of weeks when investors feared the possibility of another banking crisis.
The S&P 500 is up 4.54% YTD and slightly above its 20, 50, and 200 Day Moving Averages (DMA).
The technology sector, as represented by NASDAQ, is doing better so far this year. YTD, the index is up 13.35% and a few percentage points above its 20, 50, and 200 DMA.
We maintain a favorable view of the US stock market and economy. It is encouraging to see the banking sector seemingly stabilizing with minimal new headlines of other bank failures.
Let us know if you have any questions on this Weekly Brief or your personal financial planning. We welcome the opportunity to be of service.