Inventories drop relative to sales in June

The U.S. Census Bureau delivered potentially good news to the trucking industry Thursday, Aug. 13, when it announced that the seasonally adjusted ratio of inventories to sales for all U.S. businesses in June dropped by the largest extent in more than five years. After hitting their highest levels in more than 13 years in December, inventory-to-sales ratios have improved gradually, indicating higher freight demand may be on the way.

The inventory-to-sales ratio is a key indicator of future freight demand because even if sales are strong, manufacturers, retailers and wholesalers won’t rush to replenish stocks if inventories remain relatively high. On the other hand, even modest upticks in sales could spur production – and, therefore, transportation – of goods if inventories are relatively low.

The seasonally adjusted inventory-to-sales ratio for all businesses in June was 1.38, down from 1.41 in May, according to the Census Bureau. That’s the biggest one-month dip since November 2007, and the last time there was a larger drop was October 2001.

While the June drop in the inventory-to-sales ratio is welcome news, the number is still significantly higher than average for recent years. In 2005 through 2007, the seasonally adjusted inventory-to-sales ratio averaged 1.27 to 1.28.

Even in 2008, the average inventory-to-sales ratio was 1.27 until the number began to rise sharply in August – the same month, coincidentally, that the current decline in trucking employment started. In July 2008, the inventory-to-sales ratio was 1.26. By December, it had risen to 1.46, with the largest increases coming in October and November. In fact, the November and October increases were the largest and third-largest one-month jumps, respectively, in the inventory-to-sales ratio since the Census Bureau began reporting the numbers in 1992. The average ratio for all of 2008 was 1.31.

Given the popularity of the “Cash for Clunkers” program to encourage consumers to trade in older, less fuel-efficient cars and trucks, further improvement in the inventory-to-sales ratio seems likely for July numbers, which will be released next month.