A rising inventory/sales ratio means that inventories are rising faster than sales. In this scenario, businesses become overstocked and they respond to this unintended buildup of inventories by postponing orders and cutting production rates. An upturn in the inventory/sales ratio is a leading indicator that business conditions are deteriorating and that short-term interest rates are approaching a cyclical peak.
So what are we seeing right now? Well the inventory/sales ratio has been decreasing which indicates that business conditions are indeed improving, but the inventory adjustment process may be over. We are not going to see this contribution to GDP be as prolific as it has been in the recent past. This has been highlighted by the blog Calculated Risk:
"It now appears the inventory adjustment is over. Further growth in inventories will depend on increases in underlying demand."The April report reveals that the ratio is 1.23 which means that it would take 1.23 months to completely clear inventories at the current level of sales.