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Business inventories accounts

The report produced by the Institute for Supply Management (ISM) is derived from 370 purchasing and supply executives in over 62 different industries. 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. Using these reports to understand business trends will benefit investors in foreseeing market directions. Collectively, the two ISM reports reveal the strength of the economy, earnings and a peek into Federal Government's future moves pertaining interest rates.

The focus of the non-manufacturing ISM report is a 10 components indicators 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
  • inventory sentiment

Business inventories accounts for 10% of the overall effect, hence it is regarded as an indicator with limited market influence. It basically refers to the stored supplies and warehouse stored commodities and is a direct reflection of supply and demand. An increase in business inventories means that products have been slow-moving and the economy is in a declining state, resulting in a weaker currency.

Evalina M.Tainer, the author of the book 'Using Economic Indicators to Improve Investment Analysis' puts it best by pointing out that "inventory accumulation during sluggish economic period suggests producers will have to unload unwanted inventories and production will suffer. Tainer suggests that while a slower production may be good news for bond market that thrive on low interest rates, stock and foreign exchange investors will see a weaker dollar. Sudden accumulation of business inventories may also mean the beginning of a recession.

Besides the ISM report, The National Association of Purchasing Managers (NAPM) report is also closely monitored economic indicator published by the private sector, due to its long establishment from before World War II and accurate predictions of business cycles. Similar but different from the ISM report, the NAPM report is made up of 5 elements:

  • new orders (30%)
  • production (25%)
  • employment (20%)
  • deliveries (15%)
  • business inventories (10%)

Daniweb.com coined business inventories as "a neon signal to economists and investors alike". The website further reveal the three sources business inventory data are derived from: manufacturing, merchant wholesalers and retail reports which is the most volatile of the lot and can lead to strong fluctuation of business inventories.

Investors that are looking to access forex trend using this economic indicator can cross check business inventories to sales in order to get inventories-to-sales-ratios. This basically mean how many months it will take to sell off all inventories and the sooner that happens, the better it is for the dollar.