The inventory to sales ratio in manufacturing: a real leading business cycle indicator

Inventories are a useful statistic for tracking and analysing short-term economic developments. This paper by Floris van Ruth and Marcel van Velzen describes how the index of inventories of finished goods in the manufacturing industry can be used in business cycle analysis. Inventories themselves lag business cycle developments, and are therefore of limited use. Using the turnover index of the manufacturing industry to compute a ratio of inventory to sales (ISR) produces a new and leading business cycle indicator. The ISR is shown to consistently lead Dutch business cycle developments by one to two quarters. It is therefore one of the few real, i.e. non-financial and non-sentiment, leading indicators. Inventories are shown to exhibit clear co-movement with sales and the business cycle. The countercyclical development of the ISR is therefore explained by the fact that turnover reacts more strongly to business cycle developments than inventories.

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