Surprise, surprise. Not only did the third quarter Gross Domestic Product (GDP) surge ahead at a 7.2% annual pace, but the pickup was so strong that it caused a sharp (and quite unexpected) decline in inventory levels. In fact, inventory to sales ratios fell to record low levels in manufacturing and retailing. For the quarter, manufacturers' inventories fell 1.1% while retailers saw their levels drop 0.3%.

That decline actually held down the increase in GDP. Had inventory levels remained at the same level, GDP growth would have been 7.9%.

Meanwhile, total goods sales for the third quarter were up 11.9%, far outstripping the expansion of service sales as is typically the case early in recoveries.

Looking ahead to next year, Modern Materials Handling is forecasting a 4% plus increase in GDP. Goods sales should rise in the 5–6% range for the year.

Going into the new year, depleted inventories will be in the rebuilding stage, continuing through the winter. However, inventory to sales ratios will continue to decline as sales grow more rapidly. In part, this decline will be cyclical as excess stock is cleared out and rising credit costs keep inventories in check. But more importantly, the decline will be a continuation of a long-term trend toward better inventory management.

For instance, the overall inventory to sales ratio in February 1993, 22 months into the last recovery, was 1.51. At the same point in this recovery that number is just 1.36. As the chart shows, the long-term decline will continue, hitting 1.354 by the end of next year.

Breaking out the three components of the ratio—wholesale, retail and manufacturing— shows that wholesale has dropped the most from one recovery to the next (see chart below). The drop in the manufacturing ratio also exceeds the overall decline. While lower than 10 years ago, retail inventory levels remain well above those of manufacturing and wholesale.

However, machinery, metals and apparel have been slow to reduce ratios. These industries have missed sales targets lately, and have not generally invested in inventory management. The inventory/sales ratio for machinery is 1.94 at manufacturers and 2.43 at wholesalers. For apparel, the ratio is 1.67 in manufacturing, 1.74 in distribution, 2.50 in retail clothing and accessory stores and 1.71 at general merchandise stores. For primary metals, the ratio is 1.62 in manufacturing and 1.81 in distribution.