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July 08, 2009

The importance of inventories

Let's face it. The topic of inventories sounds pretty boring. But many economists say inventories are a key component to the future path of our economy. Why so? What's so earthshaking about inventories?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I have to chuckle when I think of inventory. I think of the furniture store that I worked in when I was in college, and I hated twice a year when we had to go around and actually count every piece of furniture, down to knobs, in our inventory. So I don't have a good relationship with inventories, but they are very important to our economy and actually to the business cycle because during a recession when sales are down, what businesses do is they sell off inventory. And, therefore, they don't order new supplies from factories, so factories, therefore, lay off workers and in some cases shut down. And so what it really takes to get the economy coming back is to have inventories depleted because then when businesses don't have the inventories to sell out of, they have to go order new things from the factory, and that causes a rebound in manufacturing. So we do track inventories, and inventories are down. That's the good news. In fact, they're down 7 percent over the last year. But the bad news is that relative to sales, inventories are still relatively high. So I think the bottom line here is that we're headed in the right direction for inventories, but like so many other economic statistics, we still need to see improvement before we get a rebound in our economic growth rate."

Posted by Dave at July 8, 2009 08:00 AM