Business Inventories

This is a report that entails a breakdown of all business orders that are lying in the manufacturers’ stores, the traders’ stores and in all retail outlets across the country. There are two version of the report - one for manufacturing sector and the other for non-manufacturing sector. Together, these two reports cover close to 90% of the economy. The report is used to establish the amount of backlog of goods and services that are in the stores of traders with a view to finding just how long the goods may stay before being sold.

How important is it?

This report is important in the since that it helps investors and trades as well as manufacturers to tell at what pace the economy is growing. By getting an idea about how much of the produced goods are still stuck in stores across the country, manufacturers may be able to gauge whether to increase production or to reduce it. It is also a clear indicator of the economic growth rate. if the business inventory figures escalate suddenly it could well mean that the economy is headed for a decline. If the same figures reduced drastically over a period, then it is also clear that the economy has started moving towards growth. The two ISM reports reveal the strength of the economy, earnings and a peek into Federal Government's future moves pertaining interest rates.

How is it computed?

The report contains data from a survey of both the manufacturing as well as the non-manufacturing sectors. While the manufacturing sector covers all manufacturing factory goods, the focus of the non-manufacturing ISM report is a 10 components indicator from the service, construction, mining as well as agricultural-based industries, including: supplier deliveries, new orders, prices, backlog of orders, business activity, employment, imports, business inventories, new export orders and inventory sentiments. Incase an investor is interested a more accurate assessment of the forex trend using this report, it would be very advisable for such persons to check the business inventory figures against sales to get an inventories to sales ratio.

How does it affect forex?

Inventory accumulation during a sluggish economic period may force producers into offloading unwanted inventories. Such a move will no doubt affect the manufacturer a great deal since some expense will have been incurred in the production and again it may force the producers to cut down production. While a slower production may be good news for bond market since it thrives on low interest rates, foreign exchange investors will see a weaker dollar as a result. Sudden accumulation of business inventories may also mean the beginning of a recession.

If business inventories accumulation persists. It is obvious that the export and import business will be greatly affected leading to a possible trade imbalance. The trade imbalance will then directly affect the strength of the dollar. On the other hand if business inventory figures decline drastically, the dollar may see renewed demand although too sudden a decline in business inventories may also signify an eminent increase in inflation levels.

How does it affect the stock market?

A high accumulation of business inventories signals a decline in purchasing power. Investors only make money out of their investments if goods are moving at a good pace and turnovers are high. It is therefore needless to say that an accumulation of business inventories spells doom to any investor. The business inventories report together with the sales report can give an elaborate insight into the pace of the market. Judging on these two factors, it is clear that the report is likely to course some change in the stock market prices. If investors read the possibility of an oncoming recession, they would hastily try to exit the market and look for better places to invest even if it means crossing international boundaries. This situation would see a sudden drop in share prices as the market losses its demand for the same.

However, in the event that business inventories decline at a good pace, the market would be registering good turnovers and that would make it a very viable investment choice for many. It would therefore be automatic that the increase in demand would lead to an increase in share prices since every investor wants a share of any profitable business.

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