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Manufacturing and Trade (M&T) Inventories is one of the lagging indicators of business-cycle conditions that we regularly follow. It represents the aggregate constant-dollar book value of inventories of materials, goods in process, and finished goods stocked by the manufacturing, wholesale, and retail sectors of the economy.
As the chart shows, the value of manufacturing and trade inventories tends to peak during a recession and decrease until a short time after the recession is over, at which point it increases steadily until the next recession. 
The key in interpreting an increase in the value of inventories is whether the buildup is wanted or unwanted. During an economic expansion, inventories may increase because manufacturers are receiving more orders for goods, and so are increasing production to fulfill those orders. Or, retailers may be stocking up in the expectation of strong sales. In either case, an increase in M&T Inventories reflects positive economic conditions. However, a rise could also be caused by the opposite -- an unexpected economic slowdown. In this case, firms are having trouble selling their stock of goods. Since changes to the amount produced may not be possible in the short-term, goods are being warehoused in the absence of buyers. One clue to whether an inventory buildup is intentional or not is to compare inventories to sales. If inventories are increasing but sales are increasing even faster, the ratio of sales to inventories will increase. That's usually a good sign for future business activity. On the other hand, if inventories are increasing but sales are decreasing, this might mean that unwanted inventories are piling up. The ratio of sales to inventories will decrease. When this happens, businesses are apt to cut back on production. They may also cut workers' hours, lay off workers, scale back plans to buy new equipment, etc. Most recently (May 2008), M&T inventories have been increasing, while sales have been decreasing. The ratio of sales to inventories peaked a few months ago and has since fallen. Taken together with other changes in our business-cycle indicators, these changes do not bode well for the economic outlook. Eventually, unwanted inventories will decrease and return to the desired balance relative to sales. And when sales pick up, producers will respond by increasing production, setting off a new inventory cycle. Related Articles Business Cycle Conditions
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