April 14, 2021
Firms are always trying to keep their inventories in line with sales. When the economy falls into recession, typically businesses do not cut back production as quickly as sales decline, so the inventory/sales ratio rises sharply — which is exactly what happened during the 2008-2009 recession and again last year. Then as the economy recovers and sales once again begin to rise, corporate leaders are able to get inventory levels into closer alignment with sales.
In January business sales rose 5.0% while inventories climbed by 0.5%. As a result, the inventory to sales ratio fell from 1.31 to 1.26. In recent months sales have outpaced inventories and the inventory/sales ratio has steadily fallen. A faster pace of sales will eventually require business people to step up the pace of production to build inventories to ensure that they have adequate supplies on hand. But supply constraints in the form of skilled labor shortages and delays in the delivery of needed supplies have constrained the ability of businessmen to boost inventory levels.